PARRISH MODULE 5 INVENTORY-DIFFERENCESPlease explain the differences between the following transactions.  Both involve reduction in price of imperfect inventory but different accounts are used.  In Transaction 2 the Periodic and Perpetual Method accounts used are exactly the same.  Would you please explain, point out the differences and why they are recorded differently.Transaction 1.Reduction in price of imperfect inventory for $10Periodic MethodAccounts Payable or Cash       10   Purchase Allowances                      10Perpetual MethodAccounts Payable or Cash    10    Inventory                                       10Transaction 2.Reduction in price of imperfect items sold for $53; reduction allowed is $25Periodic MethodSales Allowances                             25     Accounts Payable or Cash                  25Perpetual MethodSales Allowances                           25    Accounts Payable or Cash                       25

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Asked Feb 16, 2020
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PARRISH MODULE 5 INVENTORY-DIFFERENCES

Please explain the differences between the following transactions.  Both involve reduction in price of imperfect inventory but different accounts are used.  In Transaction 2 the Periodic and Perpetual Method accounts used are exactly the same.  Would you please explain, point out the differences and why they are recorded differently.

Transaction 1.

Reduction in price of imperfect inventory for $10

Periodic Method

Accounts Payable or Cash       10

   Purchase Allowances                      10

Perpetual Method

Accounts Payable or Cash    10

    Inventory                                       10

Transaction 2.

Reduction in price of imperfect items sold for $53; reduction allowed is $25

Periodic Method

Sales Allowances                             25

     Accounts Payable or Cash                  25

Perpetual Method

Sales Allowances                           25

    Accounts Payable or Cash                       25  

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Expert Answer

Definition

Inventory Write-off and inventory write-down are 2 different concepts involved in the valuation of inventory.

A permanent reduction in the value of inventory is inventory write-off whereas a reduction in the sale value of the asset than its cost price is known as inventory write-down. In both these cases, the value of inventory would reduce.

Under the periodic inventory method, the value of inventory is determined at the end of every period or at different intervals determined by the company. A physical count of inventory is made at specified intervals and all adjustments are made accordingly. The regular transactions of purchases, sales, purchase return, sales return are routed through purchase account, sales accounts, purchase return account and sales return account respectively. Day to day transactions is not adjusted to the inventory account.

Under the perpetual inventory method, all the transactions affecting inventory are recorded through the inventory account. It is the most efficient method of recording inventory.

Transaction 1 – Reduction in the price of imperfect inventory

Damaged goods or imperfect goods do not have the same price as perfect or saleable goods. Their price is usually less than the price of the prefect or saleable goods. Such price reduction results in loss of inventory value and reduction in the amount paid/payable to the supplier.

Such reduction i...

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