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Practical Application in Accounting: Recording Purchases Using the Perpetual System

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Virtually all of a company's stakeholders have a material interest in accurate accounting and financial reporting. This scenario will give you the opportunity to practice recording sales and purchases using a perpetual system of record-keeping.

The Perpetual System

In order to generate credible financial reports, a universal method for accounting is necessary. The perpetual system is a common and reliable way to record a company's sales and purchases in real time. In this method, the sum of all of the transactions must balance. This means that when a business sells a product, its cash increases but its inventory decreases. Similarly, when a business makes a purchase, its inventory increases while its cash decreases.

To learn more about this system, you can review the lesson, Recording Purchases Using the Perpetual System. You'll then apply your knowledge by identifying and correcting the errors you see in the scenario below.

Scenario: Thomas's Dilemma

Mari, Denise, and Thomas work together in the accounting department of a retail store. Mari handles receivables (incoming money), Denise is responsible for payables (outgoing money), and Thomas occupies the role of controller. As controller, Thomas is responsible for keeping the store's ''checkbook.'' As he's performing routine end-of-the-month tasks, he comes across some numbers that don't quite add up.

Let's pause for a few questions, and then we'll continue the scenario:

  • How does Thomas know that something in the perpetual recording system is not accurate?
  • What types of errors could cause discrepancies like these?

Because the perpetual system requires debits and credits to perfectly offset each other, Thomas can find errors almost immediately because the sums of the debits and credits are not equal. When inaccuracies are present, there are a few common errors for which you should be on the lookout. These common mistakes include simple arithmetic errors, confusion about whether a transaction is a debit or credit, or recording a transaction in only one column.

Now, let's get back to the scenario.

Thomas works backwards to find the source of the inaccuracies. To do this, Thomas must review the documentation related to sales and purchases.

Here's the relevant portion of the perpetual record:

Transaction ID Date Account Debits Credits Notes
1001 2-24 Cash $264.35 - Increase inventory for SKU #5544121
- - Inventory - $264.35
1002 2-24 Cash $124.36 - Increase inventory for SKU #44056659
- - Inventory - $224.35
1003 2-25 Cash $261.35 - Payment for invoice #22503
- - Accounts Receivable - $261.35
1004 2-26 Cash - $3352.26 Increase inventory for SKU #5556378
- - Inventory - $3352.26
1005 2-27 Cash $52.26 $52.26 Replenish complimentary coffee supplies
- - Accounts Payable, Invoice #444983 - $52.26

There are several errors in this portion of the perpetual record. Identify as many errors as you can. Then, correct the errors by revising the record. Once complete, compare your list of errors and proposed corrections to the accurate record below.

Errors in the Perpetual Record

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