What is Perpetual Inventory System?
Perpetual Inventory system is a system which maintains record of each and every transaction that is transfer to inventory.
In other words, this record is a subsidiary ledger account and merchandise is its control account. Purchases are entered directly on this record and also debit to Merchandise inventory. Whereas Accounts Payable or Cash account is credit. On this record, deliveries to customers are enter and then credit to Merchandise Inventory. In this case, cost of goods sold account is debited.
The balance of the inventory record at the end of period is the amount of that particular item in the ending inventory. The sum of the balances for all the items is the ending inventory for the entity.
Accounting treatment in Perpetual Inventory System
Purchases –
Merchandise Inventory Dr………………………………………………………………
Accounts Payable……………………………………………………………………………
For deliveries to customers
Cost of Goods Sold ……………………………………………………………………………….
Merchandise Inventory……………………………………………………………………………
For Purchase Returns
Accounts Payable …………………………………………………………………….
Merchandise Inventory…………………………………………………………………..
Many times in perpetual inventory system, the perpetual inventory cards does not records freight – in. Instead it is transfer to a separate account. The entry will be
Cost of Goods Sold …………………………………………………………….
Freight-in ………………………………………………………………………………………..
COGS is closed to income summary in case of periodic inventory method that is:
Income Summary ……………………………………………………………….
COGS…………………………………………………………………………………
Above entries are shown in ledger as follows –
Merchandise Inventory
| Balance …….. | Shipments …….. |
| Purchases ……. | Returns …….. |
| To Balance |
COGS
| Shipments ……….. | To Income Summary ……… |
| Freight in …………… |
Perpetual Inventory system does not require preparation of any separate Purchases account. Purchases are recorded on the debit side of the Merchandise Inventory account.
