Introduction
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Readysell runs a Perpetual Stock Inventory System, not a Periodic Inventory system. The periodic and perpetual inventory systems are different methods used to track the quantity of goods on hand. |
What's the difference?
Under the perpetual system, there are continual updates to either the general ledger or inventory journal as inventory-related transactions occur. Conversely, under a periodic inventory system, there is no cost of goods sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold.
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Perpetual means 'continuous'. This is a system where a business keeps continuous, moment-to-moment records of the number, type and value of stock that is has at the business.
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- have a constant balance (the ending balance from the previous period)
- not include the cost of purchases (they are recorded in a Purchases General Ledger Account)
- be adjusted at the end of the accounting period (so the balance reports the costs actually in inventory)
- require a physical inventory at least once per year (and estimates within the year)
- require a cost flow assumption (FIFO, LIFO, average)
- require a calculation of the Cost Of Goods Sold (to be used on the income statement)
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- be debited when there is a purchase of goods (there is no Purchases General Ledger Account used)
- be credited for the cost of the items sold (Accrued Stock)
- for the resale of goods purchased, the Cost of goods sold is recognized for each sale by debiting the account Cost of Goods Sold, and crediting Inventory.
- have its balance continuously or perpetually changing because of the above entries
- require a physical inventory to correct any errors in the Inventory account
- require a cost flow assumption (FIFO, LIFO, average)
- when the purchase invoice is completed the Accrued Stock will be debited causing a nett affect effect of 0.00 in the General Ledger Accrued Stock Account.