How do you record sales in a perpetual inventory system?
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Companies may use either the perpetual system or the periodic system to account for inventory. Under the periodic system, merchandise purchases are recorded in the purchases account, and the inventory account balance is updated only at the end of each accounting period. Perpetual inventory systems have traditionally been associated with companies that sell small numbers of high‐priced items, but the development of modern scanning and computer technology has enabled almost any type of merchandiser to consider using this system. Show Under the perpetual system, purchases, purchase returns and allowances, purchase discounts, sales, and sales returns are immediately recognized in the inventory account, so the inventory account balance should always remain accurate, assuming there is no theft, spoilage, or other losses. Consider several entries under both systems. The reference columns are removed from the illustration to simplify what you're seeing. (Note: Ap stands for accounts payable, and AR stands for accounts receivable.)
 As the two sets of circled entries indicate, two things happen when there is a sale or a sales return. First, the sales transaction's effect on revenue must be recognized by making an entry to increase accounts receivable and the sales account. Second, the flow of merchandise between inventory (an asset) and cost of goods sold (an expense) is recorded in accordance with the matching principle. A sales return has the opposite effect on the same accounts. Under the periodic system, the inventory and cost of goods sold accounts are updated only periodically, but under the perpetual system, entries that recognize a transaction's effect on these accounts occur when the revenue from the sale is recognized. For convenience, a sale or sales return can be recorded under the perpetual system with a compound entry that lists all four accounts.
The general journal provides a simple, consistent format to present new information. However, most companies would record the sale in a sales journal. The perpetual inventory system journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting under a perpetual inventory system. What is the Perpetual Inventory Method?The perpetual inventory method is a method of accounting for inventory that records the movement of inventory on a continuous (as opposed to periodic) basis. It has become more popular with the increasing use of computers and perpetual inventory management software. Although the perpetual inventory system can be more expensive and time consuming to maintain, it has the advantage that the accounting records always reflect the levels of inventory on hand at any point in time, allowing real time management of inventory. Under the perpetual inventory method each time there is a movement journals are processed to record the change. Purchases are debited to inventory and sales are credited to inventory, with the debit going to the cost of goods sold account. At the end of an accounting period, the balance on the perpetual inventory account should be the same as the physical inventory available. Differences will arise due to accounting errors, theft, shrinkage etc. An inventory count is normally carried out at least once a year to allow for discrepancies to be investigated and corrected, In each case the perpetual inventory system journal shows the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section. To purchase goods from a supplier using perpetual inventory system journal entries
To record a supplier purchase discount
To record freight costs
To record a purchase return to a supplier using perpetual inventory system journal entry
To record the sale of goods to a customer using perpetual inventory system journal entry
To record a sales return from a customer using perpetual inventory system journal entry
To record a physical inventory count shortage
To record inventory received not invoiced by supplier
*It should be noted that for a perpetual inventory system, there is no end of period bookkeeping entry. Perpetual vs Periodic Inventory System Journal EntriesThis reference guide is for perpetual inventory system, if the business is using a periodic inventory system the journal entries are different and can be seen in our periodic inventory system journal entries reference guide. The perpetual vs periodic inventory system journal entries diagram used in this tutorial is available for download in PDF format by following the link below. About the AuthorChartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. July 16, 2019 |
