Perpetual Inventory System Journal Entries

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Companies can use either a periodic or a perpetual system to record inventory transactions. In this lesson, you will learn about journal entries for a perpetual inventory system.

Keeping Track of Inventory

Let's meet Marcia, who owns Marcia's Pet Mart. Her small store sells pet food and supplies to her local community. Marcia recently expanded her business and her accountant advised her that she should start using a perpetual inventory system to keep track of her inventory, but she's not quite sure what this means or how to do this. Let's see if we can help Marcia with this problem.

Types of Inventory Systems

Merchandising and manufacturing companies have inventory, or items that a business sells to its customers. There are two ways in which companies can account for this inventory, specifically:

  • Periodic inventory system
  • Perpetual inventory system

Let's explore each of these inventory systems in more detail.

In a periodic inventory system, a company does not keep a running total of its inventory and must calculate what it sold and how much it has on hand at the end of the accounting period based on a physical count of the inventory.

In a perpetual inventory system, companies record purchases and sales of inventory as they occur, which means they know the inventory balance and the cost of goods sold at any point in time. Inventory is still counted at the end of the accounting period, but its purpose is to verify the inventory balance per the computerized system instead of using it to create the ending inventory balance.

Journal Entries in a Perpetual Inventory System

If Marcia moves to a perpetual inventory system, she will have access to better information about how much of each type of cat and dog food she has on hand at any point in time. Because sales are recorded as they occur, she will be able to identify which items are selling quickly so she can reorder before running out, as well as slower-moving items.

Let's examine the journal entries that Marcia will make in a perpetual inventory system.

When Marcia purchases dog and cat food, she will complete a journal entry to record the transaction as it occurs. Let's assume that Marcia purchases $750 of inventory on account (which means she'll pay for it at a later date). The entry will be:

purchase in perpetual

This journal entry will increase the amount of inventory that Marcia has on hand.

When Marcia makes a sale to a customer, she will record the entry at the time of sale. In a perpetual system, two journal entries are required when a business makes a sale: one to record the sale, and one to record the cost of the sale.

Let's assume that a customer purchases $57 of dog food and pays cash. The dog food purchased by the customer cost Marcia $32 to purchase from her supplier. Marcia will record the following journal entries:

perpetual - sale

In the first journal entry, Marcia records the revenue from the sale, or the amount she earned from selling her products. The second journal entry records the cost of the sale and removes the item from the store's inventory as she no longer has it.

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