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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

Explain the primary difference between the periodic and perpetual inventory systems when calculating cost of goods sold and merchandise inventory.

To determine

Explain the primary difference between the periodic and perpetual inventory system.

Explanation

Periodic inventory system: This is a system of accounting for inventory, where the quantity of inventory is recorded on a periodic basis. The up-to-date records are not maintained either for inventory or for cost of goods sold. The figure for inventory is determined only at the end of financial year or the balance sheet date. This physical count is the amount that appears in the records. This physical count is called physical inventory.

Perpetual inventory system: Under this system of accounting for inventory, the inventory bought and sold is recorded when they are bought and sold. The up-to-date records are maintained for inventory and cost of goods sold. The records show the accurate figure at any point of time during the financial year.

Explain the primary difference between the periodic and perpetual inventory system:

  • The timing of recording inventory transactions (purchases and sales) under the perpetual inventory system is on a continuous basis. Every inventory transaction is recorded whenever a purchase or sale takes place.
  • The timing of recording inventory transactions (purchases and sales) under the periodic inventory system is on a periodic basis. Purchase and sale of the inventories are recorded periodically, that is, at the end of each month, quarter or year.

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