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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¤t
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 $ecrease stockcontrol to alue o* +"ysical stocktake
Stock control account
Stock loss account
Jun 30 Balance 40,000 Jun 30 Stock loss 1,500
Jun 30 Stock control 1,500
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*ecording stoc# gains
Stock item Classic Co**ee Mac"ine Product code: CCM4300
Supplier: >illy Buyatt Valuation method: ;/;<
'ate e* /
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*ecording stoc# gains
>eneral =ournal
'ate Accounts 'ebit Cre$it
&un 30 Stock control 84
Stock )ain 84
A$=ustin) entry to increase stockcontrol to alue o* +"ysical stocktake
Stock control account
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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