Inventory Systems (Chapter 12) [P1+2] Flashcards
What is the perpetual stock system
The balance of the trading stock account (book value) is continuously balanced to the physical value in the store
What happens in the perpetual stock system
- TS account is dr with CP when stock is bought
- TS account is cr with CP when stock is sold
- COS is calculated after every sale, using MUP% and COS account is dr
- additional cost incurred in purchasing stock (carriage, customs duty) is dr to TS account
- when stock is returned by customer, COS account is cr and TS account is dr
- when stock is returned to supplier, TS account is cr
What is the periodic stock system
The value of stock on hand (closing stock) will only be determined at the end of a period/at regular intervals
What happens in the periodic stock system
- purchases account is dr with CP when stock is bought
- when stock is sold, COS can’t be determined, so no entry
- COS is only calculated after physical stock count is done after closing stock is determined
- additional cost incurred in purchasing stock (carriage, customs duty) is dr to the relevant expense account
- TS account is not updated when the stock is returned by a customer
- when stock is returned to the supplier, the value is cr to purchases account
- at end of period: opening stock + purchases - closing stock = COS
- balance in TS account will only reflect opening stock value at beginning of year and closing stock value at end of year
Importance of doing stock take when using perpetual stock system
- business can determine closing stock by referring to TS account
- physical stock take is done, and this value is compared with book value in the TS account, forming part of the internal control process as it verifies the reliability of book value and determines stock losses
- TS deficit = book value - physical value
Importance of doing stock take when using periodic stock system
- business can’t determine closing stock by referring to books, must do a stock take
- closing stock value can’t be compared to any amount in books, so it’s difficult to determine stock losses
- business can estimate stock losses
Characteristics of perpetual stock system
- TS account is continuously updated when stock is bought and sold, there is good control over the movement of stock
- Balance in TS account (closing stock) should be equal to the actual value of physical stock, stock losses are easily detected
- COS account represents CP of stock sold. Therefore, GP can be determined at any point to keep track of MUP% policy
- Used in businesses selling expensive stock and has low stock TO
- Due to complexity, expensive computer equipment is required
- Easy to determine TS deficit
- When stock is purchased, TS account is dr
- Carriage on purchases and customs duty accounts are dr to TS account as it increases cost of stock
Characteristics of periodic stock system
- TS account is not affected by movements of stock during the year, reflects opening stock amount throughout the year
- Value of closing stock is determined by physical stock take done periodically, therefore it’s difficult to determine stock losses after stock take
- No COS account as COS can’t be determined at the point of sale, and is only calculated at the end of the financial year after stock take
- Used in business where CP is difficult to determine or it isn’t viable to determine CP of single item
- Cheap to administer as it requires no expensive computer equipment
- No TS deficit account as it is difficult to determine
- When stock is purchased, purchases account is dr
- Carriage on purchases account is dr when goods purchased is transported by another business
- Customs duty account is dr when goods are imported
Stock accounts in periodic stock system
- trading stock
- sales
- debtors allowances
- purchases
- carriage on purchases
- customs duty
- opening stock
- closing stock
Internal control to keep stock from being stolen
- stock in the storeroom must be kept safe to guard against theft, access limited to senior staff only
- stock on shop floor should be tagged
Internal audit to prevent stock being stolen
Conduct walk-through tests to ensure controls are being adhered to
Internal control measures for fraud, obsolete stock, stock beings ordered for personal use
- records should be kept and movement of stock recorded in proper journal
- proper authorisation and approvals should be obtained for procurement of stock
- delivered stock should be compared to delivery note/purchase invoice and any errors reported
- separation of duties
- regular stock takes
Internal audit measure for fraud, obsolete stock, stock being ordered for personal use
Conduct substantive tests on representative samples of transactions, source documents, and records by checking information and reperforming tasks
Steps for doing closing transfers to trading account
- Close off debtors allowances to sales account
- Transfer balance in TS account to opening stock account
- Close off opening stock, purchases, carriage on purchases, customs duty to trading account
- Enter closing stock amount to TS account and closing stock account
- Close off sales and closing stock to trading account
- Calculate GP and transfer to profit and loss account
Calculating COS with periodic stock system
COS = TO - GP
Or
(Opening stock + purchases + carriage on purchases + customs duty) = goods available
- closing stock
= COS
