The first accounting method to cover today is perpetual inventory, which is a computerized inventory system that keeps continuous detailed records of purchase and sale of inventory, and cost of goods sold.
A perpetual inventory system is a computerized system, and can also be known as a point-of-sale system or point-of-purchase system. It utilizes scanners and barcodes that contain relevant information that can be captured immediately.
EXAMPLEFor example, as so as soon as you make a purchase or a sale, the perpetual inventory system is able to capture information about it.
So, exactly what information is captured by the perpetual inventory system? The information is gathered includes:
EXAMPLEFor instance, if you make a purchase, your inventory is going to go up. If you make a sale, your inventory is going to go down.
Now, there are several accounting implications for the perpetual inventory system. Remember, each transaction in a perpetual inventory system happens in real time.
Now, is a physical inventory count required in a perpetual inventory system? The answer is no, it's not; however, some firms still complete a physical count of their inventory at year end because it can help to reduce inventory loss, as well as reduce theft.
The second accounting method is periodic inventory, which is a physical inventory count and calculation of cost of goods sold, done at the end of the period.
The periodic inventory is an entirely manual process, done by hand through a physical inventory count and then by calculating cost of goods sold at the end of the period. Physical inventory counts need to be performed in order to know how much inventory is on hand.
Information captured in a periodic inventory system is captured periodically. A physical inventory count is done annually, quarterly, or monthly, depending on what the need might be. The important thing to note is that the information is only captured periodically, in terms of how much inventory is on hand and the cost of goods sold.
Here are some of the accounting implications for the periodic inventory system, for each transaction:
So, is a physical inventory count required? Absolutely yes, because that is how inventory is determined, as well as the cost of goods sold. Therefore, performing that physical inventory count helps to calculate inventory, as well as the cost of goods sold.
Source: Adapted from Sophia instructor Evan McLaughlin.