Inventory Accounting: Perpetual vs. Periodic Systems

This set explores the differences between perpetual and periodic inventory systems, key terms of sale, and the specific ledger accounts and calculations used in periodic inventory reporting.

Perpetual Inventory

A system that updates inventory and cost of goods sold after every purchase and sales transaction.

Periodic Inventory

A system that delays updating of inventory and cost of goods sold until the end of the period, which misstates inventory during the period.

Physical Inventory

The process of counting, weighing, or measuring each kind of inventory on hand to determine inventory quantities.

FOB Shipping Point

Terms of sale where ownership of goods passes to the buyer at the point the public carrier takes possession from the seller.

FOB Destination Point

Terms of sale where ownership of goods passes to the buyer only when the goods reach the buyer's location.

Sales Returns and Allowances

A contra revenue account to the Sales account with a normal debit balance.

Purchases Account

The account debited in a periodic inventory system to record the acquisition of merchandise for resale.

Purchase Returns and Allowances

A contra account that is credited for the return of goods originally purchased on account.

Freight In

An account debited when the purchaser directly incurs the freight costs for shipping goods.

Net Sales

$$\text{Sales} - \text{Sales returns and allowances}$$

Net Purchases

$$\text{Purchases} - \text{Purchase returns and allowances}$$

Cost of Goods Purchased

$$\text{Net purchases} + \text{Freight in}$$

Cost of Goods Available for Sale

$$\text{Inventory, January 1} + \text{Cost of goods purchased}$$

Cost of Goods Sold (Periodic)

$$\text{Cost of goods available for sale} - \text{Inventory, December 31}$$