Under the perpetual inventory system, the business maintains a running record of inventory and cost of goods sold. This system achieves control over expensive goods such as jewelry, furniture and automobile.
Periodic inventory system is used for relatively inexpensive goods. For example, it may be too costly for convenient stores to keep a daily running record of every loaf of bread and every can of pop they buy and sell. Instead, these stores count periodically their inventory to determine the quantities on hand and to calculate cost of goods sold.
Different Accounting Entries
In the perpetual system, purchase of inventory is recorded by debiting the inventory account. To record sales, two entries are needed. The first entry is to record the sale in the usual manner – debit Cash or Accounts Receivable and credit Sales Revenue for the sale price of the goods. The second entry is to debit Cost of Goods Sold and to Credit Inventory for cost. This entry serves to keep an up-to-date record of the cost of inventory on hand. The inventory account and the cost of goods gold account carry an up-to-date balance throughout the period.In periodic system, purchases of inventory are recorded as an expense in Purchase account. Sales are recorded as usual - debit Cash or Accounts Receivable and credit Sales Revenue. And there is no need to record cost of goods sold and inventory. Throughout the period, the inventory account carries the beginning balance left over from the end of the preceding statements. At the end of the period, an inventory physical count should be carried out to determine the actual inventory on hand and calculate cost of goods sold accordingly. An entry will be needed to clear Purchase account and setup the Inventory balance and Cost of Goods Sold.
There are pros and cons for each system. Perpetual system is generally more expensive to maintain but provides more accurate and up-to-date information. On the other hand, periodic system is easier to maintain. This system is being used less and less as more business computerized their inventory system.
