PERIODIC INVENTORY

SYSTEM VS. PERPETUAL

INVENTORY SYSTEM
 PERIODIC INVENTORY SYSTEM
 
 This system is characterized by the use of the following account titles:
 
 ASSET ACCOUNTS
 
Merchandise Inventory, End – this refers to the unsold merchandise at
the end of the accounting period as determined by physical counting and
inventory taking. The normal balance of this account is debit.
 COST ACCOUNTS
 Merchandise Inventory, Beginning – this refers to the
merchandise inventory at the beginning of the period which will
turn from an asset into costs when such period ended. This account
is usually credited in the adjustment.
 
 Purchases – this account is debited when merchandise are
purchased either in cash or on credit.
 Purchase Discounts – this account is credited when there is
discount availed from a supplier for early payment of
merchandise purchased on credit.
 Purchase Returns and Allowances – this account is credited
for merchandise purchased either in cash or on credit that were
returned to the supplier for reason of bad order or does not fit to
the description of the merchandise ordered and were not replaced
due to non-availability of stocks of merchandise by the supplier.
 Freight-In – this account is debited for the freight and handling
charges of merchandise purchased by the buyer or customer and
shipped via land, sea and air transportation.

 INCOME ACCOUNTS
 
 Sales – this account is credited for merchandise that are sold either
in cash or on credit.
 Sales Discounts – this account is debited for sales discount
given to a customer for early collection from his/her account.

 Sales Returns and Allowances – this account is debited for

merchandise sold either in cash or on credit but were returned by
the customer for reason of bad order or does not fit the
description of the merchandise ordered and were not replaced
due to non-availability of stock.
 Freight-Out – this account is debited for freight and
handling charges of merchandise sold to customers and
shipped via land, sea and air transportation.

UNDER PERIODIC INVENTORY SYSTEM, BEING AN ASSET OR COST

CAN ONLY BE IDENTIFIED BY INDICATING MERCHANDISE
INVENTORY, END OR MERCHANDISE INVENTORY, BEGINNING.
 I. PERPETUAL INVENTORY SYSTEM

This is characterized by the use of Merchandise Inventory Account as an ASSET with the
following debit and credit postings:

Merchandise Inventory

Debit Credit
1. To record purchases 1. To record purchase returns and allowances
2. To record freight-in 2. To record purchase discounts
3. Excess of actual inventory against stock card 3. Excess of stock card against actual count
The sample of filled-up stock card of only one (1) item is presented below:

STOCK CARD
Supplier: Sarangani Cattle Ranch
Description: TOP ROUND BEEF
Unit RECEIVED ISSUED BALANCE
Date
Cost Quantity Amount Quantity Amount Quantity Amount
Jan. 1 P 240.00 50 kgs. P12,000.00
8 240.00 100 kgs. P24,000.00 150 kgs. 36,000.00
80 kgs. P19,200.00 70 kgs. 16,800.00

Cost of Ending
Sales Inventory
 There is no need to establish ending inventory because the stock
card reflect both the cost of sales and the inventory at the end.
 However, physical inventory count may still be conducted to
check the accuracy of the stock cards or control cards. If the
quantity and amount per stock card will not reconcile with that of
the physical inventory count, the inventory per physical count
will prevail.
 An adjustment will be made so that inventory per stock will
reconcile with the balance per physical count.
 Under Perpetual Inventory System
1. In recording Sales, there are two (2) entries that must be prepared:
 1st Entry:
Accounts Receivable XXXX
Sales XXXX
  2nd Entry:
Cost of Sales XXXX
Merchandise Inventory XXXX
2. In recording Sales Returns and Allowances, there must also be
another two (2) entries:
1st Entry:
Sales Returns and Allowances XXXX
Accounts Receivable XXXX
 
2nd Entry:
Merchandise Inventory XXXX
Cost of Sales