Tanauan Institute, Inc.

– Senior High School Department

TANAUAN INSTITUTE, INC.

Senior High School Department

Modified Learning Scheme : Workbook

Fundamentals of Accountancy, Business and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________

Name: ___________________________________ Score: ________________

Section: __________________________________ Date: _________________

Topic Session

Inventory System Chapter 6

Objectives of the Lesson

At the end of the lesson, the student should be able to:
1. Describe the difference between the periodic and perpetual inventory
system.
2. Compare and contrast the entries needed for the periodic and perpetual
inventory system.
3. Analyse and journalize transactions under the periodic and perpetual
inventory system.

Values Integration
Perseverance. The attitude that no matter how difficult an issue or a
problem maybe one will still continue until he or she succeeds. The lesson
that will be discussed involves analytical thinking which will require the
perseverance of the students in order to learn it.

Vocabulary

Discussion

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 Tanauan Institute, Inc. – Senior High School Department

Inventory Systems
Merchandise inventory is the key factor in determining cost of sales. Because
merchandise inventory represents goods available for sale, there must be a method of
determining both the quantity and the cost of these goods.
There are two systems available to merchandising entities to record events related to
merchandise inventory:
Perpetual Inventory System
The perpetual inventory system is an alternative to the periodic inventory system. Under
perpetual inventory system, the inventory account is continuously updated. Perpetually
updating the inventory account requires that at the time of purchase, merchandise
acquisitions be recorded as debits to the inventory account. At the time of sale, the cost
of sales is determined and recorded by a debit to the cost of sales account and a credit
to the inventory account. With a perpetual inventory system, both the inventory and cost
of sales receive entries throughout the accounting period.
Many merchandising entities are now using the perpetual inventory system with point-
of-sale (POS) equipment. Computers have decreased in prices. These powerful
machines have dramatically reduced the time required to manage inventory.
Supermarkets and department stores use point-of-sale scanners built into the checkout
counters to collect transactional data for the cash register and to update their perpetual
inventory system. In the absence of point-of-sale scanners, the perpetual inventory
system is more advisable for firms that sell low-volume, high-priced goods such as
motor vehicles, jewelry and furniture.
When an entity uses the perpetual inventory system, the ending inventory should
reconcile with the actual Physical Count at the end of the period assuming that no theft,
spoilage, or error has occurred. Even if there is a little chance for or suspicion of
inventory discrepancy, most entities make a physical count. At that time, the account is
adjusted for any inaccuracies discovered. The count provides an independent check on
the amount of inventory that should be reported at the end of the period.
Periodic Inventory System
The periodic inventory system is primarily used by businesses that sell relatively
inexpensive goods and that are not yet using computerized scanning systems to
analyse goods sold. A characteristic of the periodic inventory system is that no entries
are made to the inventory account as the merchandise is bought and sold. When goods
are purchased, a separate set of accounts – purchases, purchase discounts, purchases
returns and allowances, and transportation in (freight in) – is used to accumulate
information on the net cost of the purchases. Only at the end of the period, when the
inventory is counted, will entries be made to the inventory account to establish its proper
balance.

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The periodic inventory system will be used in the succeeding discussions. To illustrate
the major parts of the merchandising income statement, selected transactions made by
T. Calaguas Traders will be used unless otherwise stated.
Periodic and Perpetual Inventory Systems Compared
(The following are shown in order for students to see the difference in the manner of
recording for cost of sales or cost of goods sold, just relax, read, and observe the
difference in the journal entries. No analysing required… yet)
This part will demonstrate the entries typically used with the periodic inventory system;
contrasted to the entries used with the perpetual inventory system.
Assume the transactions (nos. 1 to 7) were the only transactions for the entire year, the
balance in the inventory account at the year-end under periodic inventory system is
P250,000 (beginning inventory). The year-end balance in the inventory account under
the perpetual inventory system is P231,860.
Under the perpetual inventory system, the inventory account is increased by purchases,
transportation in (freight in), and sales returns and is decreased by the cost of sales,
purchases returns and allowances, and purchases discounts.
At year-end, the physical inventory is taken, and it revealed that the actual inventory on
hand is P231,500. The year-end journal entries (nos. 8 to 10) are then made to bring
the inventory account balance into agreement with the amount of the physical inventory.
When posted to the general ledger (or the T-Account in our discussion), both the
periodic and perpetual inventory systems result in the same ending inventory amount,
P231,500.
Transactions:
Periodic Inventory System Perpetual Inventory System
Selling Transaction
1. Sold merchandise on account costing P8,000 for P10,000; terms were 2/10,
n/30:
Account Receivable 10,000 Accounts Receivable 10,000
Sales 10,000 Sales 10,000

Cost of Sales 8,000

Inventory 8,000

Sales Return Transaction

2. Customer returned merchandise costing P400 that had been sold on account for
P500 (part of the P10,000 sale):
Sales Returns & Sales Returns &
Allowances 500 Allowances 500
Accounts Receivable 500 Accounts Receivable 500

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Inventory 400
Cost of Sales 400

Payment Receipt Transaction

3. Received payment from the customer for merchandise sold above [cash discount
taken: (P10,000 sale – P500 return) x 2% discount = P190]:
Cash 9,310 Cash 9,310
Sales Discounts 190 Sales Discounts 190
Accounts Receivable 9,500 Accounts Receivable 9,500

Purchase Transaction or Merchandise Acquisition Transaction

4. Purchased on account merchandise for resale for P6,000; terms were 2/10, n/30
(purchases recorded at invoice price):
Purchases 6,000 Inventory 6,000
Accounts Payable 6,000 Accounts Payable 6,000

Freight Payment Transaction

5. Paid P200 freight on the P6,000 purchase; terms were FOB shipping point,
freight collect:
Freight in 200 Inventory 200
Cash 200 Cash 200

Purchase Return Transaction

6. Returned merchandise costing P300 (part of the P6,000 purchase):
Accounts Payable 300 Accounts Payable 300
Purchases Returns & Inventory 300
Allowances 300

Payment Transaction
7. Paid for merchandise purchased, refer to no.4 [cash discount taken: (P6,000
purchase – P300 return) x 2% discount = P114]:
Accounts Payable 5,700 Accounts Payable 5,700
Purchases Discounts 114 Inventory 114
Cash 5,586 Cash 5,586

Closing Entry
8. To transfer the beginning inventory balance to the Income Summary account
(part of the closing entries under the periodic inventory system):
Income Summary 250,000 (no entry required)
Inventory 250,000

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 Tanauan Institute, Inc. – Senior High School Department

9. To record the ending inventory balance (part of the closing entries under periodic
inventory system):
Inventory 231,500 (no entry required)
Income Summary 231,500

10. To adjust the ending perpetual inventory balance for the shrinkage during the
year:
Shrinkage already effected Cost of sales 360
In the no. 9 entry Inventory 360

Note: It is advisable to return and analyse this part after you have studied the next two
chapters. Memorizations of the accounts involve and which to debit or credit is a must,
even though one may not understand why the journal entries are like that.

Questions

1. Compare and contrast perpetual and periodic inventory system.

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2. In the journal entries that was provided above, what is the main difference
that can be noticed between perpetual and periodic inventory system?
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3. If you are given a chance to own a merchandising business what system
will you implement, perpetual or periodic? Why?
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Activity

Direction: Kindly search and cite the name of a business that operates within
your community or province that uses periodic inventory system and another
one for business which uses perpetual inventory system. (One Example for
each inventory system) Provide a comprehensive explanation why you think

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that the cited business uses such inventory system. Put your answer and
explanation below.

Quiz
Directions: Modified True or False. Write True (on the space provided
before each number) if the statement is correct and False if the statement is
incorrect. On the space provided after each statement write the part of the
incorrect statement that makes it FALSE or incorrect.
__________1. The periodic inventory system provides an up-to-date amount of
inventory on hand. ____________________
__________2. The periodic inventory system relies on a physical count of merchandise
for its balance sheet amounts. ____________________
__________3. Under periodic inventory system, cost of goods sold is treated as an
account. ____________________
__________4. Under periodic inventory system, purchases of merchandise are not
recorded in the Merchandise Inventory account. ____________________
__________5. There is no need for a physical count in the perpetual inventory system.
____________________
__________6. When periodic inventory system is used, a physical inventory should be
taken at the end of the fiscal year. ____________________
__________7. Under perpetual inventory system, the cost of merchandise is debited to
Merchandise inventory at time of purchase. ____________________
__________8. The two main systems for accounting for merchandise are periodic and
perpetual. ____________________

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 Tanauan Institute, Inc. – Senior High School Department

__________9. An entity would be more likely to know the amount of inventory on hand
if it used the periodic inventory system rather than the perpetual inventory system.
____________________
__________10. An advantage of using the periodic inventory system is that it requires
less recordkeeping than the perpetual inventory system. ____________________

Reflection
As an accounting student what did realize in the lesson?
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References

Book:
Ballada, Win. 2017. Fundamentals of Accountancy Business & Management
1. Manila, Philippines. DomDane Publishers. pp. 197-200.

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