Inventory Systems: Periodic vs. Perpetual
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Ran CañeteInventory Systems: Periodic vs. Perpetual
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Ran CañeteCommon questions
Powered by AIAccounts Payable increases when merchandise is purchased on account in both systems, reflecting the obligation to the supplier. The key difference lies in the other accounts affected; in periodic systems, it impacts Purchases, whereas, in perpetual systems, Inventory is adjusted immediately as seen with a P6,000 purchase recorded in Source 1.
In a periodic inventory system, sales returns are recorded by reversing the sale entry with an entry to Sales Returns & Allowances and Accounts Receivable, without affecting inventory directly. In a perpetual inventory system, both the accounts receivable and the inventory are adjusted; Sales Returns & Allowances and Cost of Sales accounts are debited, and Accounts Receivable and Inventory are credited. For example, a return of merchandise costing P400 is recorded differently, as seen in Source 1.
In both systems, cash payments reduce Accounts Payable and Cash. In perpetual systems, inventory reflects the payment at cost less any discounts received, while in periodic systems such payments impact the Purchases account directly. Source 1 shows accounts like Accounts Payable and Cash being affected by a payment of P5,586 after discount on goods initially purchased for P6,000.
A perpetual inventory system continuously updates inventory levels and costs with each transaction, negating the need for periodic adjustments for beginning and ending balances during closing entries. Inventory records already reflect all changes, as shown in Source 1, where closing entries to transfer inventories are not necessary for a perpetual system.
Purchase returns decrease the Accounts Payable and Inventory accounts in a perpetual inventory system, reflecting the immediate adjustment to inventory levels. In a periodic system, they are similarly recorded but reflect changes in the Purchases Returns & Allowances account instead of directly adjusting Inventory, affecting the overall net purchases calculation. For example, a P300 return is handled by reducing both Accounts Payable and Inventory under perpetual, as seen in Source 1.
In a periodic system, shrinkage is typically accounted for at year-end when performing physical counts; no specific account exists for shrinkage. However, in perpetual systems, shrinkage directly adjusts inventory balances, often as a Cost of Sales debit and Inventory credit. Source 1 demonstrates shrinkage for P360 being automatically adjusted through Cost of Sales in perpetual systems.
In a perpetual inventory system, a cash discount taken affects the Inventory account since inventory is recorded at cost net of discounts. In periodic systems, the discount is credited to Purchases Discounts, impacting the net purchases but not directly adjusting inventory. Source 1 shows a discount of P114, which is reflected differently under both systems in terms of account debits and credits.
In both systems, merchandise returns reduce revenue but differ in cost recognition. Under periodic systems, return impacts Sales Returns & Allowances without direct inventory adjustments until a period end. In perpetual systems, return affects both revenue accounts and inventory through Cost of Sales adjustment, as Source 1 depicts with a P500 revenue adjustment and P400 inventory correction.
In both systems, sales discounts reduce the total revenue recognized. The discount is recorded as a Sales Discount expense, reducing Accounts Receivable by the discount's amount and reflecting cash received net of the discount. For example, a sale less a P500 return, results in a P190 discount recorded in Source 1.
Freight costs under both periodic and perpetual inventory systems are capitalized as part of the inventory cost. In both systems, the cost of freight is recorded as an increase to Inventory. For example, in Source 1, the freight-on purchase, which was P200, is added to the Inventory account, reflecting its direct inclusion in the product cost.