Periodic vs Perpetual Inventory System

Periodic inventory is the system in which the company does not track individual item movement but only performs physical counts at the month-end. The business only knows the inventory quantity at the beginning and month-end, but they will not know the exact amount in the middle of the month. Moreover, the company is not able to track the daily inventory movement. They only rely on the physical count at a specific point in time.

Under the periodic system, new inventory purchases will be recorded into the inventory account after receiving. The cost of goods sold will be calculated by deducting the ending balance.

It makes sense when we look at the formula, the beginning balance plus new purchase less ending must result as the sold item. However, if the items are not sold, but they are broken or stolen. This system will account for those items as sold. This formula only uses to make assumptions and calculate the quantity of inventory being sold. To calculate the valuation of goods sold, it will be a problem when the cost we spend changes over time. We will use the valuation methods such as FIFO, LIFO, and Weighted average.

Periodic Journal Entries

Purchase inventory from a supplier on credit: when company purchase inventory, we have to debit purchase accounts and credit accounts payable. Purchase account is the temporary account under inventory which will be reverse in next journal entry.

Account	Debit	Credit
Purchase	000
Accounts Payable		000

Purchase discount: The company needs to make journal entry by debit accounts payble and credit purchase discount.

Account	Debit	Credit
Accounts Payable	000
Purchase Discount		000

Purchase return: If there is purchase return, company need to debit accounts payable and credit purchase return.

Account	Debit	Credit
Accounts Payable	000
Purchase Return		000

Inventory Sale: When company makes sale, they need to debit accounts receivable and credit sale.

Account	Debit	Credit
Accounts Receivable	000
Sale		000

Sale Discount: When company provide sale discount to customer, they need to debit sale discount and credit accounts receivable.

Account	Debit	Credit
Sale Discounted	000
Accounts Receivable		000

Sale Return: If customer return the products for any reasons, we need to debit sale return and credit accounts receivable.

Account	Debit	Credit
Sale Return	000
Accounts Receivable		000

Month-end journal entries: At the end of the month, company need to debit inventory, cost of goods sold and credit beginning inventory & total purchase during the month. Ending inventory depend on the actual count which will present in the balance sheet. Cost of goods sold is calculated base on above formula, and it will present on the income statement. Beginning inventory is the amount broughforward from prior month, it needs to credit as we already record ending inventory. Purchase amount is the total purchase during the month, we need to reverse it to zero as we already recognize ending inventory.

Account	Debit	Credit
Inventory (Ending Balance)	000
Cost of Goods Sold	000
Inventory (Beginning Balance)		000
Purchase (total purchase during the month)		000

Perpetual Inventory System

Perpetual inventory is the system in which company keeps track of each inventory item level since it was purchase and sold to the customer.

This system allows the company to know exactly how much inventory they have at any specific time period. They just log into the system and it will tell the remaining balance. Moreover, the tracking of the cost of goods sold will be more accurate if compare to periodic. The cost of goods will be the total cost of goods being sold during the month, it not the balancing figure between the beginning and ending balance.

Perpetual Journal Entries

Purchase inventory credit: When purchase inventory from supplier on credit, we need to debit inventory and credit accounts payable.

Account	Debit	Credit
Inventory	000
Accounts Payable		000

Purchase discount: If supplier provide purchase discount, we need to debit accounts payable and credit inventory.

Account	Debit	Credit
Accounts Payable	000
Inventory		000

Purchase return: When we return the inventory to supplier, we need debit accounts payable and credit inventory.

Account	Debit	Credit
Accounts Payable	000
Inventory		000

Inventory Sale: When company sale goods to customer, they need to debit accounts receivable and credit sale, it base on the amount company charege to customer. At the same time, they need to debit cost of goods sold and credit inventory, it is the cost of inventory that sold to customer.

Account	Debit	Credit
Accounts Receivable	000
Cost of Goods Sold	000
Inventory		000
Sale		000

Sale Discount: when we provide sale discounted to the customer, we need to debit sale discount and credit accounts receivable.

Account	Debit	Credit
Sale Discounted	000
Accounts Receivable		000

Sale Return: When customer return the goods, we need to reverse the journal entry when we record sale.

Account	Debit	Credit
Sale Return	000
Inventory	000
Cost of Goods Sold		000
Accounts Receivable		000

Month-end Journal entry: None

Different between Periodic and Perpetual

Transaction	Periodic	Perpetual
Inventory account	Inventory account only updates at the month-end. It shows the balance which remains at the month-end only.	Inventory accounts will be updated continually every time there are purchases and sales.
Cost of Goods Sold	The cost of goods sold is only calculated and record at the month-end. It is a balancing figure.	COGS will be recorded every time the items sold.
Sale Transactions	Every sale made, we record only: Dr. A/R or Cash Cr. Sale	Every sale made, we record as following: Dr. Accounts Receivable Cr. Sale Dr. COGS Cr. Inventory
Closing Entries	At the month-end, we need to calculate the cost of goods sold by using the above formula. And make the journal as below: Dr. COGS Cr. Inventory	Does not require closing entries regarding inventory and cost of goods sold.