Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792
[MUSIC PLAYING] Hey everyone, and welcome to our video today on inventory accounting methods. So what are we discussing today? Well, today, we're looking at inventory accounting methods. We're going to look at perpetual inventory and periodic inventory. We're going to talk about what they are and how they're used. And then we're going to finish up each of those inventory accounting methods by talking about some specific accounting procedures applicable to that accounting method.
So let's start with that first one. Let's start with our perpetual inventory. So what is perpetual inventory? It's a computerized inventory system that keeps continuous detailed records of purchase and sale of inventory and cost of goods sold.
So a perpetual inventory system is going to be a computerized system. And it can also be known as a point-of-sale system or point-of-purchase system. It's going to utilize scanners and barcodes that's going to contain that information that we capture immediately.
So information, like I just said, information captured in a perpetual inventory system is captured immediately. So as soon as we make a purchase, as soon as we make a sale, we capture the information about that.
So what information is gathered? Well, it'll be the time of purchase or the time of sale, as well as the price. So how much did we pay for the inventory? How much did we sell it for? The payment method. Was it cash or credit?
And then our inventory. So our inventory is going to be updated immediately. If we make a purchase, our inventory is going to go up. And if we make a sale, our inventory is going to go down.
So now, let's talk about some of the accounting implications for our perpetual inventory system. So each transaction in a perpetual inventory system happens in real-time. That means that every time we make a purchase or purchases our inventory goes up immediately. Any time that we have a sales, so our sales, our cost of goods sold goes up. So our cost of goods sold gets recorded immediately. And our inventory goes down because of that sale. Our purchases and our sales information updates immediately in real-time as soon as we make that purchase, as soon as we make that sale.
And that means that our merchandise inventory reflects our actual balance. So any time that we look into our accounting system we can look at our merchandise inventory and know that that reflects the actual balance of merchandise that we have.
Is a physical inventory count required in a perpetual inventory system? Well, no, it's not, but some firms are still going to complete a physical count of their inventory at year-end because it can help to reduce inventory loss, as well as reduce theft. So that's our perpetual inventory.
Now let's look to that second accounting method, periodic inventory. So what is periodic inventory? It's a physical inventory count and calculation of cost of goods sold done at the end of the period.
OK. So the periodic inventory is an entirely manual process. Everything is done by hand through a physical inventory count and then calculating cost of goods sold at the end of the period.
We have to perform physical inventory counts in order to know how much inventory is on-hand. And information captured in a periodic inventory system is captured periodically. OK. So we do a physical inventory count annually, quarterly, monthly, depending on what the need might be. So that information is only captured periodically in terms of how much inventory do we have on hand and what was our cost of goods sold.
So now, let's look at some of the accounting implications for our periodic inventory. So each transaction in a periodic inventory system, our purchases, our inventory does not change. OK. So in a periodic inventory system, our inventory doesn't change. All of our purchases get recorded to a purchases account. So we create a separate account called purchases that we record all those purchases to.
Our sales, our cost of goods sold does not get recorded when we make a sale. And our change in inventory does not get recorded. So when we have a transaction that takes place in sales, we don't record cost of goods sold, and we don't record inventory. That's done at the end of the period.
So our merchandise inventory balance reflects the most recent physical inventory count. So it's not updated in real-time in a periodic system. So our merchandise inventory will reflect the most recent physical inventory count.
So is a physical inventory count required? Yes, it is, of course it is because that's how we determine our inventory as well as our cost of goods sold. So performing that physical inventory count helps us calculate our inventory as well as our cost of goods sold. So that's our periodic inventory.
So now that we've discussed perpetual and periodic inventory let's summarize what we talked about today. In a nutshell, we looked at inventory accounting methods. We started with the perpetual inventory. And that's a computerized inventory system that keeps continuous detailed records of purchase and sale of inventory and cost of goods sold. And then we finished up with periodic inventory. And that's a physical inventory count and calculation of cost of goods sold done at the end of the period.
I hope everybody enjoyed this video. And I hope to see you next time.