perpetualinventorysystem

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Principle of Accounting

Chapter 8

The Perpetual Inventory System

BA. in International Business

Foreign Trade University


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utline

!hat is inventory"

The physical stoc#ta#e

Perpetual inventory system

The stoc# control account

$ou%le&entry under the perpetual

method The cost price of sales

FIF stoc# valuation


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utline 'Cont(d)

The role of stoc# cards

Stoc# cards and the general ledgerStoc# losses and stoc# gains

*ecording stoc# losses and gains

From stoc# cards to +ournals


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!hat is inventory"Inventory, The goods that a trading -rm

%uys and sells.

A trading -rm %uys its inventory and sellsit at a higher price in order to earnrevenue.

/clude from inventory, non&current

assets.


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The physical stoc#ta#ePerform at least once every

reporting period.

To determine the actual amount ofinventory on hand at a given date.

The value of inventory0 asdetermined %y the physical

stoc#ta#e0 is included in the%alance sheet as a current asset.


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The physical stoc#ta#e 'Cont(d) T1o processes of a physical stoc#ta#e,

2. Count the num%er of units of each type

of inventory.3. $etermine the cost price of each of these

units to calculate the total value of stoc#on hand.

Stoc# sheets are used to record the detailsof a physical stoc#ta#e.


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Stoc# sheetStock item Quantity Cost Value

AB cricket bats 50 40 2,000

VCA cricket balls 100 18 1,800

Mitre soccer balls 30 22 0

!ooka "ockey sticks 15 1 240

#otal stock on "an$ 4,%00


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Perpetual inventory The inventory account is updatedevery time stoc# moves in or out

of the %usiness.


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Perpetual inventory 'Cont(d)$isadvantages,

2. Additional recordeeping

Increase 1or#load0 increase insta4.

3. Additional costs

Sta4 costs0 costs of computer

pac#age to maintain inventoryrecords.

5. The need for a physical stoc#ta#e atthe end of the reporting period is not

eliminated.


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Perpetual inventory 'Cont(d)Advantages,

2. 6reater control over stoc#

3. Slo1&moving and fast&moving linesof inventory can %e identi-ed.

5. *eordering of inventory is moree7cient.

. Interim pro-t reports can %eprepared 1ithout doing a stoc# ta#e.

9. The level of stoc# losses or gainscan %e measured.


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The stoc# control account The stoc# control account is used

to record all movements of

inventory. $e%it side, records purchases of stoc#

Credit side, records sales of stoc#

The %alance of the stoc# control

a:c represents the total cost ofstoc# on hand at that particularpoint in time.


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The stoc# control account'Cont(d)

Stock control account

Increases in inventoryare caused by:

Decreases in inventoryare caused by:

• Purchasing goods

• Stock gains

• Selling goods

• Stock losses


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$ou%le&entry under the

perpetual method ; A summary#ransaction &ournal Source $ocuments 'ouble (entryBou)"t)oo$s *orcas"

Cas" +ayments

C"eue -butt. Stock control 'r

Cas" at bank Cr

Bou)"t)oo$s oncre$it

Cre$it +urc"ases

/noice -ori)inal. Stock control 'r

Cre$itors Cr

Sol$ )oo$s*or cas"

Cas"recei+ts

ecei+t -co+y. Cas" at bank 'r

Sales Cr Cost o* sales 'r

Stock control Cr

Sol$ )oo$son cre$it

Cre$it sales /noice -co+y. 'ebtor 'r

Sales Cr

Cost o* sales 'r


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Identifying the cost price ofsales

Four methods:

Identifed cost

First-in-frst-out (FIFO) Last-in-frst-out (LIFO)

Weighted average cost


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First&in&-rst&out stoc#valuation

Assumes that the -rst inventorypurchased is the -rst inventory

sold.Firms normally try to #eep stoc#

moving in line 1ith purchases datesto prevent old items from %eing

shop&soiled0 outdated.


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FIF & /ample

urc"ases Sales

'ate ot o Qty nitcost

#otal 'ate Qty nit S

&an 1 1 50 60 300 &an 4 40 1260

2 50 62 310 7 30 1265

13 3 50 65 325 18 20 1265

24 4 50 6 330 31 50 1267

#otal 200 1,25 140


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FIF ; /ample 'Cont(d)Cost o* sales Stock on "an$

Quantity nit cost Value Quantity nit cost Value

50 60 300 10 65 5

50 62 310 50 6 330

40 65 20 0 375

140 8%0


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The stoc# card

A form of su%sidiary ledger that isused to record the -nancial

transactions of one particular itemof inventory.


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Stoc# card ; An e/ampleStock item Sony 30cm colour #V Product code: S#V84720030

Supplier: 9"olesale :lectricals Location: 9est 15

Valuation method: ;/;<

'ate e*erence /


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Stoc# cards and the generalledger

General ledger Subsidiary ledger

Stock control account Stock cards

A summary o* inentory Many in$ii$ual recor$s

#otal o* =ournals are

+oste$ +erio$ically

ot +art o* $ouble(entry

o in$ii$ual $etails o*stock items

+$ate$ continuouslyt"rou)"out t"e +erio$


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Schedule of stoc# cards

/nentory $escri+tion ro$uct co$e Qty Cost Value

Sony 30cm #V S#V84720030 15 170 2,850

Sony 45cm #V S#V84020217 10 2%0 2,%00

!embrook VC !M84343%870 12 250 3,000

!embrook C' +layer !M843727232 20 150 3,000

Balance o* stock control le$)er account 11,550


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Stoc# losses and stoc# gains

A stock loss

Balance per physical stoc#ta#e <

Balance in the stoc# cards.A stock gain

Balance per physical stoc#ta#e =Balance in the stoc# cards.


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*easons for stoc# losses

Undersupply %y suppliers

versupply to customers

Theft*ecording errors in the stoc# cards

$ou%le invoicing %y supplier

Stoc#ta#ing errors


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*easons for stoc# gains

versupply %y suppliers

Undersupply to customers

*ecording errors in the stoc# cards.Stoc#ta#ing errors.


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*ecording stoc# losses

Stock item Sony 30cm colour #V Product code: S#V84720030

Supplier: 9"olesale :lectricals Valuation method: ;/;<

'ate e*erence /


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*ecording stoc# losses

>eneral =ournal

'ate Accounts 'ebit Cre$it

&un 30 Stock loss 1,500

Stock control 1,500

A$=ustin) entry to $ecrease stockcontrol to alue o* +"ysical stocktake


Stock loss account

Jun 30 Balance 40,000 Jun 30 Stock loss 1,500

Jun 30 Stock control 1,500


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*ecording stoc# gains

Stock item Classic Co**ee Mac"ine Product code: CCM4300

Supplier: >illy Buyatt Valuation method: ;/;<

'ate e* /


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*ecording stoc# gains

>eneral =ournal

'ate Accounts 'ebit Cre$it

&un 30 Stock control 84

Stock )ain 84

A$=ustin) entry to increase stockcontrol to alue o* +"ysical stocktake


Stock gain account

May 31 Balance 25,000

May 31 Stock gain 84

May 31 Stock control 84


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Practice >uestions

/ercise 8.2

/ercise 8.3

/ercise 8.5/ercise 8.2?


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@ome1or#

/ercise 8.22

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