Lesson 030 - Accounting for Merchandising Operations 4: Periodic and Perpetual Inventory System

Summary

This educational video script delves into the intricacies of accounting for merchandising operations, focusing on the periodic and perpetual inventory systems. It explains the lack of detailed inventory records in the periodic system, which relies on year-end physical counts, versus the perpetual system, which maintains ongoing inventory records to support management decisions. The script illustrates the differences through various transactions, emphasizing the perpetual system's real-time inventory tracking and its impact on financial reporting.

Takeaways

• 📚 The video discusses accounting for merchandising operations, focusing on two inventory systems: periodic and perpetual.
• 🔍 The periodic inventory system does not maintain detailed inventory records throughout the year, only requiring a physical count at the end of each period.
• 📈 The perpetual inventory system keeps detailed records of inventory, updating with every purchase and sale, which aids in management decision-making.
• 🛒 For purchases, both systems record the transaction, but the perpetual system also updates the inventory balance.
• 🔄 When returns occur, the periodic system adjusts accounts payable and purchase returns, while the perpetual system updates the inventory records accordingly.
• 💰 Sales transactions are recorded by debiting accounts receivable and crediting sales in both systems, but the perpetual system also records the cost of goods sold and updates inventory.
• 📉 The cost of goods sold is an important figure derived from the perpetual inventory system, representing the inventory that has been sold.
• 💡 The perpetual inventory system provides real-time inventory data, which can be crucial for businesses to manage stock levels and sales strategies.
• 💼 The script includes an example of transaction recording for both systems, illustrating the differences in handling purchases, returns, and sales.
• 📋 The video transcript mentions International Accounting Standard 2, which guides the valuation of inventory in financial statements.
• 🙏 The presenter concludes with a reminder to seek divine guidance for wisdom in understanding and applying the concepts taught.

Q & A

What are the two types of inventory systems discussed in the script?

The two types of inventory systems discussed are the periodic inventory system and the perpetual inventory system.

What is the main difference between the periodic and perpetual inventory systems?

The main difference is that the periodic inventory system does not maintain detailed records of inventory throughout the year, only requiring a physical count at the end of each period, while the perpetual inventory system maintains detailed records of inventory with every purchase and sale, updating the inventory balance in real-time.

How does the perpetual inventory system support management decision-making?

The perpetual inventory system supports management decision-making by providing real-time information on the actual amount of inventory on hand, which can be used to make informed decisions about buying or purchasing inventories.

What is the significance of recording inventory transactions in the perpetual system?

Recording inventory transactions in the perpetual system is significant because it allows for continuous tracking of inventory levels, which is crucial for accurate financial reporting and operational planning.

What is the initial transaction recorded on May 1st according to the script?

The initial transaction on May 1st is a purchase of merchandise from Ryu Merchandising amounting to thirty thousand three hundred fifteen, with terms two over ten and over thirty.

How does the script describe the handling of a purchase return in the perpetual inventory system?

In the perpetual inventory system, a purchase return is recorded by debiting accounts payable for the amount of the return and crediting merchandise inventory for the same amount, reflecting the reduction in inventory and accounts payable.

What is the entry recorded for a sale on account in the periodic inventory system?

In the periodic inventory system, a sale on account is recorded by debiting accounts receivable for the selling price and crediting sales for the same amount, without adjusting the inventory records at the time of sale.

What additional entry is required in the perpetual inventory system when recording a sale?

In the perpetual inventory system, an additional entry is required to record the cost of goods sold and to update the merchandise inventory, debiting cost of goods sold and crediting merchandise inventory for the cost of the merchandise sold.

How does the script illustrate the recording of a sales discount in the perpetual inventory system?

The script illustrates the recording of a sales discount by debiting cash for the amount received after the discount, crediting accounts receivable for the original amount, and noting the discount taken.

What is the purpose of the handout 030 mentioned in the script?

The purpose of handout 030 is to provide additional information related to the periodic and perpetual inventory systems, which is meant to enhance understanding of the concepts discussed in the script.

What does the script suggest for further learning after discussing inventory systems?

The script suggests that the next lesson will be about special journals and subsidiary ledgers, indicating a continuation of the accounting topic.

Outlines

00:00

📚 Introduction to Inventory Systems

The video introduces the topic of accounting for merchandising operations, focusing on two types of inventory systems: periodic and perpetual. Viewers are instructed to download handout 030, which covers these inventory systems. The periodic inventory system does not keep detailed records during the year, requiring physical counts at period end. In contrast, the perpetual inventory system maintains detailed records for every purchase and sale, aiding in management decisions.

05:00

🛒 Recording Purchases and Returns

The video explains how to record purchases and returns in both inventory systems using an example from May 1 and May 2. In the periodic system, purchases are debited to purchases, and returns are credited to purchase returns and allowances. In the perpetual system, purchases and returns update the merchandise inventory account directly. The advantages of the perpetual system in maintaining up-to-date inventory records are highlighted.

10:03

📈 Sales Transactions in Inventory Systems

Sales transactions are illustrated with examples from May 3 and May 5. In the periodic system, sales are recorded by debiting accounts receivable and crediting sales. The perpetual system requires additional entries to update the cost of goods sold and merchandise inventory accounts. The process of recognizing inventory removal from the warehouse in the perpetual system is detailed, emphasizing the need for accurate inventory records.

📝 Additional Transactions and Payments

Further transactions, including equipment purchases and payments to suppliers, are discussed. For equipment purchases, both systems record the transaction by debiting equipment and crediting cash. Payments to suppliers, such as on May 7, involve calculating and recording purchase discounts. The perpetual system also considers the cost of getting inventory to the buyer's location, as per international accounting standards. Sales on account and subsequent payments by customers are recorded similarly in both systems, with additional inventory adjustments in the perpetual system.

Keywords

💡Accounting for Merchandising Operations

This term refers to the process of recording and analyzing the financial transactions related to the purchase and sale of goods by a business. It is central to the video's theme, as the script discusses the accounting methods for such operations. The video script mentions this in the context of explaining the two inventory systems and their impact on the recording of transactions.

💡Periodic Inventory System

A periodic inventory system is a method of accounting where inventory records are not continuously updated but are instead measured only at the end of an accounting period. The script introduces this system and contrasts it with the perpetual inventory system, highlighting that it does not maintain detailed inventory records throughout the year.

💡Perpetual Inventory System

This system involves maintaining detailed records of inventory levels continuously, updating them with each purchase and sale. The video emphasizes the perpetual inventory system's ability to support management decision-making by providing real-time inventory data, as seen in the script's discussion of its advantages and application in various transactions.

💡Journal Entries

Journal entries are the initial records of financial transactions in accounting, which are later posted to the general ledger. The script discusses how journal entries are recorded differently under the periodic and perpetual inventory systems, affecting the tracking and valuation of inventory.

💡Physical Count

A physical count is the process of manually counting the inventory on hand to verify the accuracy of inventory records. The script mentions that under the periodic inventory system, an actual physical count is required at the end of each accounting period, which is a key difference from the perpetual system that tracks inventory in real-time.

💡Purchase Returns and Allowances

This term refers to the process of returning goods to a supplier and receiving a credit or allowance for those returns. In the script, an example is given where defective merchandise is returned, and the accounting entries for this transaction differ between the two inventory systems.

💡Cost of Goods Sold (COGS)

Cost of Goods Sold is the direct cost attributable to the production of the goods sold by a company. The script illustrates how COGS is recorded in both inventory systems, especially under the perpetual system, where it is updated with each sale to reflect the cost of the merchandise sold.

💡Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, but before deducting other operational costs. The script uses the example of a sale to calculate gross profit, showing the difference between the selling price and the cost of goods sold.

💡Accounts Receivable

Accounts receivable represents the money owed to a company by its customers for goods or services provided on credit. The script discusses the accounting entries for sales on account, which increase the accounts receivable and, under the perpetual system, also affect the inventory records.

💡Inventory Balance

Inventory balance refers to the quantity of goods a company holds available for sale. The script explains that the periodic inventory system does not maintain an ongoing inventory balance, whereas the perpetual system continuously updates the inventory balance with each transaction.

💡International Accounting Standard 2 (IAS 2)

IAS 2 is a standard that provides guidance on how to account for inventories. The script briefly mentions this standard in the context of the cost of inventory, which should include all costs up to the point that the inventory is ready for sale, as per the standard's requirements.

Highlights

Introduction to the two types of inventory systems: periodic and perpetual.

Explanation of the periodic inventory system, including its lack of detailed inventory records during the year.

Importance of an actual physical count of goods at the end of each period in the periodic inventory system.

Description of the perpetual inventory system, which maintains detailed inventory records with each purchase and sale.

Advantages of the perpetual inventory system in supporting management decision-making by providing up-to-date inventory levels.

Comparison of journal entries for the purchase of merchandise in both periodic and perpetual inventory systems.

Handling of defective merchandise returns in both inventory systems.

Recording sales transactions in both periodic and perpetual inventory systems, including the calculation of gross profit.

Detailed steps for recording inventory adjustments in the perpetual inventory system after a sale.

Example of a sales transaction and the required entries in both inventory systems.

Explanation of the international accounting standards related to inventory costs.

Process of recording the payment of accounts payable with a purchase discount.

Steps for recording sales returns and the related accounting entries.

Final entries for cash received from customers paying their accounts in full.

Preview of the next lesson on special journals and subsidiary ledgers, emphasizing the importance of seeking guidance and wisdom.

Transcripts

[Music]

oh

[Music]

hello everybody so today we will be

discussing accounting for merchandising

operations

and we will be focusing on the two

different types of inventory system

which is the periodic inventory system

and the perpetual inventory system

before anything else please download

handout 030

which relates to periodic and perpetual

inventory system

the link is available in the description

box

okay the two types of inventory systems

are periodic inventory system and

perpetual inventory system

way of recording journal entries nadine

discussed nothing

in the previous lessons periodic

inventory system

but now i will be introducing you to

another inventory system

which is the perpetual inventory system

okay so let's talk about it one by one

under the system of periodic inventory

system there is no detailed record of

inventory

being maintained during the year only an

actual physical count of the goods

remaining on hand is required at the end

of each period

on proper inventory balances unless

actual physical account at the end of

the accounting period

okay so in the periodic inventory system

there is no maintenance

of

inventory system you don't know the

proper level of inventory

actual physical count at the end of the

accounting period

what if kala gitna an accounting period

okay so the periodic inventory system

does not maintain a detailed record of

inventory

so what happens is that we just adjust

the accounting records at the time

that we will just be doing an actual

physical count of the inventories that

we have

now the difference of a periodic

inventory system with the other system

the perpetual inventory system is that

we have a detailed inventory record

inventories

accounting system so in every purchase

and sale

i detailed

inventory records the advantage of

perpetual inventory system

is that in every purchase and sale we

know

the actual amount of inventory on hand

which can support management decision

making in

buying or purchasing inventories

okay so

inventory system

maintenance detailed records

but perpetual inventory system young

acting inventory records

update in every purchase and sale

i hope you understand the difference

between periodic inventory system and

perpetual inventory system

and to further maximize your learning we

will now be doing a problem okay so

let's try recording

these transactions which involves

both periodic inventory system and

perpetual inventory system

for may 1 the current pong purchase of

merchandise from ryu merchandising

amounting to thirty thousand three

hundred fifteen with the terms two over

ten and over thirty

the helpful ito a purchase of

merchandise on account kapagappa

periodic system yeah

in the previous lessons debit lantanam

purchases for the amount of 30

350 and credit accounts payable

named to rio merchandising your supplier

for another thirty thousand three

hundred fifty

however in perpetual inventory system

accounting records every purchase and

sale

inventory balance

for the amount of 30 350 and then credit

accounts payable

for thousand three hundred fifty let's

move on to may two

some eightu returned one thousand two

hundred pesos worth of defective

merchandise

to ryu merchandising

is a defective own is worth one thousand

two hundred

so satin periodic system

accounts payable to real merchandising

parama in one thousand two hundred

and then it is purchase returns and

allowances for 1200.

perpetual systems update on inventory

records

so perpetual system

merchandise inventory debit accounts

payable real merchandising 1200

and credit merchandise inventory for 1

200.

let's move on to meet returns action

sold merchandise on account to miss

friday vargas

worth sixteen thousand five hundred

fifty which is that is the selling price

that's on account has a two over ten and

over thirty and

terms the merchandise costs ten thousand

four hundred forty

annuity

forty ben anton attend then sixteen

thousand five hundred fifty

so you can grasp the situation that the

sales amount is sixteen thousand five

hundred fifty

and the cost of goods sold is ten

thousand four hundred forty

gross profit gross margin that is your

tuple

so in the periodic inventory system we

simply debit accounts receivable

from friday vargas which is 16 550

selling price

and then credit sales for sixteen

thousand five hundred

fifty so perpetual inventory system

ganon parent

on recording nothing on sales debit

accounts receivable friday vargas 16

550 and credit to sales sixteen thousand

five hundred fifty

pero pugna record tired on sales a

perpetual inventory system

again we need to take into consideration

that the inventory records and the

accounting

records or the inventory records in the

ledger

shall always be updated in every

purchase return or sale

so now entry na

recognize the inventory from the

warehouse dahil nagbenta tayo

debit cost of goods sold for 10 440

which is the cost of the merchandise

that was initially purchased bhagavata

okay friday vargas and then credit

merchandise inventory

ten thousand four hundred forty i hope

you understand

entry nothing required perpetual

inventory system

it's because we need to record the sales

transaction

and we also need to record the inventory

in the warehouse and accordingly

inventory records nothing and then for

may 5 that is just

a simple sales transaction to miss

yoon for 5680 which simply debits cash

and credit sales

that will still be the same entry for

the perpetual inventory system

but always remember in the perpetual

inventory system

meron tayong additional entry to record

the sales

of the goods na inventory nalumabas

warehouse so debit cost of goods sold

and credit merchandise inventory

for 3500 the cost of the merchandise

some a transaction amount purchased

computer set from

unsu sales amounting to 57

57 880

okay

set i partner companies equipment so in

this

inventory song entering attention eight

direction attend debit equipment credit

cash

and same amount and entry with the

perpetual inventory method

for maintenance i paid the real

merchandising in full sonar

merchandising merchandising is 30

350. merchandise

merchandising is twenty nine thousand

one hundred fifty

terms merchandising is two over ten and

over thirty

nine thousand one hundred fifty which is

five hundred eighty three pesos near a

record pool nothing purchase discount on

baba yarana

think here you merchandising is a cash

amount of twenty eight thousand five

hundred sixty seven

so perpetual inventory

ias 2 international accounting standard

2.

international accounting standard

hunting standard

inventory so according to international

accounting standard 2

the cost of inventory shall involve the

cost

of the purchase and then casamarinpu

uh binayaranathen in order for the

inventory to

have it in the location of the buyer

kayangapu in

nathaniel

and two percent discount okay let's

continue with may 11. somebody eleven a

month sold merchandise on account to

lana kala

twenty five thousand so alumni and the

regional entire accounts receivable from

la najala twenty 25 000 and then

credit sales potion and 25 000. that

will also be your same

entry to record sales under the

perpetual inventory system

per ira record ponatan's a perpetual

inventory system young pagla bus no

inventory is a warehouse

worth twenty two thousand debit cost of

goods sold twenty two thousand credit

merchandise inventory

twenty two thousand summative naman po

friday vargas paid her account in full

s

see miss friday vargas so begin punatin

simmons friday vargas and discount

okay so accounts receivable

is friday of august 16 550.

and the two percent of sixteen thousand

five hundred fifty

is three hundred thirty one pesos

received

in cash sixteen thousand two hundred

nineteen and that will be also

the same entry for the perpetual

inventory system

entry inventory

inventory okay

vargas and then lastly on may 25 la

nakana

la nakala paid her account in full so

tina nathan can be beginning

uh 25 000 young selling price

2 over 10 and over 30 on 10 days for now

may 11 and may 21

may 25 now so indeed discount period

we simply debit cash for the amount

received from island

of 25 000 credit accounts receivable for

25 000 and that would also be

the same entry in the prayer and the

perpetual inventory system

i hope you understand our lesson today

in our next lesson

would be about special journals and

subsidiary ledgers

always remember to ask the lord for his

guidance

and wisdom

call to me and i will answer you and

tell you great and unsearchable things

you do not know

thank you and have a great day

[Music]

me