PERPETUAL INVENTORY SYSTEMS

HOW IT WORKS

A detailed record of inventory is kept on an ongoing basis.

Requires a certain level of technology in order to be cost-effectively used.

HOW IT WORKS (CONTINUED)

Goods are received from suppliers. This generates a source document called a receiving report.

These reports are sent to the data entry clerk along with any goods returned to suppliers.

This information provides an accurate and up-to-date amount for the Merchandise Inventory account.

THERE IS NO PURCHASES ACCOUNT!!!!!

HOW IT WORKS (3)

The sales end of perpetual inventory tends to be more complex.

Normally, the business will have a scanner that reads a code on any merchandise sold. The information is then transferred to the business’ central computer and will automatically make deductions from the merchandise inventory account.

EXAMPLE

Purchase of merchandise inventory for cash

Merchandise Inventory 100.00HST Recoverable 15.00

Bank115.00

Note that there is no “Purchases” account in perpetual inventory!

EXAMPLE

Sales of merchandise for cashBank 28.75

Sales 25.00 HST Payable 3.75

Cost of Goods Sold 15.00Merchandise Inventory 15.00

The first journal entry represents the sale price of the merchandise and the second represents the cost of the merchandise.

REFERENCE

Section 11.6 See the examples on p. 463-464