Question

In your initial post, present a detailed explanation of the recording of purchases under a perpetual inventory system. Use hypothetical figures to illustrate the perpetual inventory system. After presenting your hypothetical figures, discuss how a perpetual inventory system is different from a periodic inventory system. Your answer should illustrate understanding of the perpetual inventory system.

Answer 1

Under the perpetual inventory system, the inventory records is being updated on entry to entry basis ie. on run-time basis. After every entry, the selling department could able to know the inventory in hand and the cost which is to be allotted to the goods sold. The closing stock are always being updated in terms of inventory balance and cost per unit of inventory.

Example:
Inventory at the beginning = 1000 units @ $10 per unit
Purchased on 10th of the month = 2000 @ $11 per unit
Purchase return to supplier of Purchase on 10th = 500
Purchased on 15th of the month = 3000 @ $12 per unit
Sold on 18th of the month = 2500 @ $24
Return from customer of Sales on 18th = 500
Under perpetual inventory system, the daily updation takes
place through following system:
Date	Purchase		COGS			Inventory
	Units	cost/unit	Units	cost/unit	Amount$	Units	cost/unit	Amount$
Begin						1000	10	10000
10th	2000	11				3000	10.67	32000
Pur return	-500	11				2500	10.6	26500
15th	3000	12				5500	11.36	62500
18th			1000/1500	10/11	26500	3000	12	36000
Sale return			-500	11	-5500	3500		41500
Closing Balance						3500		41500

There exists very clear difference between the Perpetual and Periodical Inventory system, like:

1) In perpetual the recording of transaction is entry to entry whereas in periodical it is after completion of period.

2) ending inventory is determined after every entry in Perpetual but in Periodical, it is on physical count.

3) High control of management in Perpetual Inventory, whereas there is no control in Periodical.

4) Temporary accounts are maintained in Periodical whereas no such accounts are maintained in Perpetual, but every entry is done in main Inventory account.

5) In Perpetual cost can be determined at every transaction, but in Periodical it is determined after the period end.