Merchandising Operations and the Accounting Cycle - Pearson

OBJECTIVE 2
Account for the purchase and
sale of inventory under the perpetual
inventory system
226 Part One The Basic Structure of Accounting
Inventory Systems:
Perpetual and Periodic
There are two main types of inventory accounting systems: the periodic system and
the perpetual system.
The periodic inventory system is used by businesses that sell relatively inexpensive
goods. A very small grocery store without an optical-scanning cash register
to read UPC codes does not keep a daily running record of every loaf of bread and
package of bacon that it buys and sells. The cost of record keeping would be overwhelming.
Instead, grocers count their inventory periodically—at least once a year—
to determine the quantities on hand. The inventory amounts are used to prepare
the annual financial statements. Businesses such as restaurants and small retail stores
also use the periodic inventory system. The end-of-chapter supplement covers the
periodic inventory system. That system is being used less and less as more businesses
keep their inventory records by computer.
Under the perpetual inventory system, the business maintains a running record
of inventory and cost of goods sold. This system achieves control over expensive
goods such as automobiles, jewellery, and furniture. Recently, the low cost of computer
information systems has increased the use of perpetual systems. Computers
reduce the time required to manage inventory and thus increase a company’s ability
to control its merchandise. But even under a perpetual system the business
counts the inventory on hand at least once a year. The physical count establishes the
correct amount of ending inventory, which may have been affected by pilferage or
spoilage, and serves as a check on the perpetual records.
The following chart compares the perpetual and periodic systems:
Perpetual Inventory System
• Keeps a running record of all goods
bought and sold (units and price).
• Inventory counted at least once a year.
• Used for all types of goods.
Periodic Inventory System
• Does not keep a running record of all
goods bought and sold.
• Inventory counted at least once a year.
• Used for inexpensive goods.
Computerized Inventory Systems
A computerized inventory system can keep accurate, up-to-date records of the
number and cost of units purchased, the number and cost of units sold, and the
quantities and cost on hand. Inventory systems are often integrated with accounts
receivable and sales. The computer can keep up-to-the-minute records, so managers
can call up current inventory information at any time. For example, in a perpetual system
the “cash register” at Zellers or The Bay is a computer terminal that records the
sale and also updates the inventory records. Bar codes, which are scanned by a laser,
are part of the perpetual inventory system. The lines of the bar code represent coded
data that keep track of each item. Because most businesses use bar codes, we base our
inventory discussions on the perpetual system. 1
Purchasing Merchandise in the
Perpetual Inventory System
The cycle of a merchandising entity begins with the purchase of inventory, as Exhibit
5-2 shows. For example, a stereo centre records the purchase of cassette players,
compact disc (CD) players, and other items of inventory acquired for resale by
1 For instructors who prefer to concentrate on the periodic inventory system, an overview starts on page
247 and a comprehensive treatment of that system begins on p. 279. Follow Chapter Objectives S2
through S5 instead of 2 through 4.