A perpetual inventory system maintains up-to-date records of inventory and cost of goods sold as transactions occur, contrasting with the periodic system’s end-of-period approach. Page 6 introduces it as a widely adopted method, especially with technology, providing managers with ongoing insights into stock levels and profitability.
For companies like Computer City (Page 8), perpetual systems ensure accurate tracking of high-value or high-volume merchandise, such as monitors, facilitating efficient operations and financial reporting.
Purchases are recorded as they happen, increasing the Inventory account. Page 8 illustrates Computer City’s September 15 purchase of 20 Regent monitors from Okawa Wholesale Co. for $6,000 (terms 2/10, n/30):
Journal Entry:
Debit Inventory $6,000
Credit Accounts Payable $6,000
This entry reflects the asset acquisition and liability to the supplier, posted to both general and subsidiary ledgers.
Payments reduce cash and accounts payable. On October 1, Computer City paid Okawa $6,000:
Journal Entry:
Debit Accounts Payable $6,000
Credit Cash $6,000
This updates the general ledger and the accounts payable subsidiary ledger, completing the purchase cycle.
Sales involve two entries: one for revenue and one for cost of goods sold. On October 1, Computer City sold two monitors to RJ Travel Agency for $2,000 (cost $1,200):
Revenue Entry:
Debit Accounts Receivable $2,000
Credit Sales $2,000
Cost Entry:
Debit Cost of Goods Sold $1,200
Credit Inventory $1,200
The revenue entry records the sale at the selling price, while the cost entry transfers the inventory cost to expense, reducing the Inventory account. Both are posted to general and subsidiary ledgers (e.g., accounts receivable and inventory).
Cash collection completes the sales cycle. On October 7, Computer City collected $2,000 from RJ Travel Agency:
Journal Entry:
Debit Cash $2,000
Credit Accounts Receivable $2,000
This increases cash and reduces receivables, finalizing the transaction with a $800 gross profit ($2,000 - $1,200).
Page 8 emphasizes that the Inventory account is adjusted with each purchase and sale, supported by subsidiary ledgers tracking individual items. This real-time data aids management and ensures accurate financial statements.
Periodic physical counts verify perpetual records. At year-end, Computer City’s ledger showed $72,200, but a count revealed $70,000, requiring an adjustment:
Journal Entry:
Debit Cost of Goods Sold $2,200
Credit Inventory $2,200
This accounts for shrinkage (e.g., theft, spoilage), aligning records with actual stock.