## 4. Perpetual and periodic inventory systems

There are two inventory accounting systems - perpetual and periodic:

Perpetual inventory system means that the Inventory account is adjusted perpetually. The Inventory account is affected each time inventory is sold or purchased.

Periodic inventory system only adjusts the Inventory account at the end of an accounting period. Purchases and sales do not affect the Inventory account during the accounting period, but do affect at the period end.

Although both systems have different approaches to inventory accounting, they are to provide the same results. The cost of goods sold amount and the sales amount should be the same regardless which system a company applies.

## 5. First illustration of accounting for inventory (period 1)

In our example, we will follow the rules of the perpetual inventory system. Under the perpetual inventory system sales and purchases of inventory are recorded directly to the Merchandise Inventory account when they take place. The accounting events below refer to a bookstore business called Dav's Books that was opened in 20X6:

1. The owner contributed \$3,000 of inventory and \$9,000 cash to the business.
2. \$4,000 cash was paid to purchase additional inventory.
3. \$200 cash was paid for the inventory transportation (see Event No. 2) from the vendor to the bookstore.
4. Inventory that cost \$2,000 was sold for \$5,500 cash.
5. Transportation expenses of \$300 to deliver the sold goods (see Event No. 4) were incurred and paid with cash.
6. \$400 of selling expenses were incurred and paid with cash.

## 5.1. Analysis of capital contribution transaction

Event No. 1: The owner made a combined capital contribution that consisted of cash and inventory. Cash (\$9,000), Inventory (\$3,000), and Contributed Capital (totally, \$12,000) increase. This is an asset source transaction:

Illustration 1: Effect of capital contribution

 Event No. Balance Sheet Income Statement Cash Flows Cash + Inv. = Cont. Cap. + Ret. Earn. Rev. - Exp. = Net Inc. Beg. \$   0 + \$   0 = \$   0 + \$   0 \$   0 - \$   0 = \$   0 1 9,000 + 3,000 = 12,000 + n/a n/a - n/a = n/a 9,000 FA End. 9,000 + 3,000 = 12,000 + 0 0 - 0 = 0

## 5.2. Analysis of inventory acquisition transaction

Event No. 2: The Merchandise Inventory account increased when the \$4,000 inventory purchase was made. Inventory increased and cash decreased. This is an asset exchange transaction:

Illustration 2: Effect of inventory acquisition

 Event No. Balance Sheet Income Statement Cash Flows Cash + Inv. = Cont. Cap. + Ret. Earn. Rev. - Exp. = Net Inc. Beg. 9,000 + 3,000 = 12,000 + 0 0 - 0 = 0 2 (4,000) + 4,000 = n/a + n/a n/a - n/a = n/a (4,000) OA End. 5,000 + 7,000 = 12,000 + 0 0 - 0 = 0
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