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Perpetual & Periodic Inventory Methods

Explain perpetual and periodic inventory methods of recording merchandise inventory.
Record the following transactions in general journal in perpetual and periodic inventory methods.Give necessary working for cost of goods sold and ending inventory in support of your solution.

Jan 1, 2005 inventory on hand 1-1-2005 50000
Jan 5 Purchase of inventory for cash 100000
Jan 5 Purchase of inventory on account-terms 2/10,n/30 215000
Jan 5 Cost of transportation & freight 5000
Jan 10 Inventory returned to supplier 15000
Jan 15 Paid supplier in full after deducting 2% discount 196000
Jan 15 Sale of inventory on account-Cost 270,000-
terms 2/10,n/30 324000
Jan 20 Inventory returned by buyer-cost 20000 24000
Jen 25 Received cash from account receivable less 2% discount 294000
Jan 31 Physical count showed inventory on hand-cost 101000.

Solution Preview

Solution to the above question and problem is provided in the M.S.Word file attached herewith in the following parts.
1 Detailed explanation of perpetual inventory and periodic inventory methods.
2 Full working for cost of goods sold and General ledger inventory account for verification of ending inventory.
3 Comparative general journal entries of two systems in columnar form with each transaction details.

Perpetual inventory Method:
In perpetual method the business keeps continuous record of each inventory item. The inventory is recorded as and when it is purchased and issued for consumption or sold to customers. Computerized perpetual system can provide up to the minute inventory data regarding Receipts, issues and balance of each item of inventory. In perpetual inventory system purchases and sales are recorded directly to inventory account. Following are the important features of this system.

1 Purchases are directly debited to inventory account. Purchase account is not involved in this accounting system.

2 Cost of Goods sold is debited and inventory is credited for each unit consumed or sold. Inventory is debited and cost of goods sold is credited for the goods returned by the buyers.

3 Purchase discount allowed by the supplier for the prompt payment as per the terms is credited to inventory account and not the purchase discount account.

4 Any difference in inventory balance by physical count and book value is recorded as inventory over and short.

Periodic Inventory Method:
In periodic system the business does not keep ...

Solution Summary

The solution explains perpetual and periodic methods of recording merchandise inventory.