Recording inventory in the General ledger

Question 1

How do huge companies manage inventory? (2)

Answer 1

1. Barcodes scanned as purchased- inventory increases

2. As sold products scanned, inventory decreases

Question 2

What method of recording do huge companies use?

Answer 2

The perpetual method

Question 3

What do smaller businesses do?

Answer 3

1. They only record purchases of inventory from supplier and returns of inventory to supplier throughout the financial year
2. Calculate COS periodically (at the end of the financial year/period

Question 4

Define perpetual

Answer 4

occurring repeatedly; so frequent as to seem endless and uninterrupted

Question 5

Define periodic

Answer 5

appearing or occurring at intervals

Question 6

What account does the periodic system use instead of the Inventory account that the perpetual system uses?

Answer 6

The periodic system uses a temporary “purchases account”

Question 7

What happens to this “purchases account”?

Answer 7

1. It doesn’t appear on the financial statements

2. Gets closed off at year end

Question 8

How would the return of inventory look on the perpetual system?

Answer 8

DR Bank/Trade Receivables
CR Sales income

DR Cost of sales expense
CR Inventory

Customer returns inventory, adj JE’s:

DR Sales income
CR Bank/Trade Receivables

DR Inventory
CR Cost of sales expense

Question 9

What would the return of inventory look like on the periodic system and why?

Answer 9

DR Bank/Trade receivables
CR Sales income

Customer returns inventory, adj JE’s

DR Sales income
CR Bank/Trade Receivables

As inventory records are only updated at the end of the year via purchases account

Question 10

What is the “stock count” on the periodic system?

Answer 10

The stock count is the on hand inventory at the end of the year

Question 11

What is the most vital formula in the inventory section/

Answer 11

Cost of sales = opening inventory + purchases - closing inventory

Question 12

What are adjusting journal entries?

Answer 12

They ensure that the information used to prepare financial statements accurately reflect the assets, liabilities, equity, income and expenses of the business at that point in time.

Question 13

Income and expense accounts are closed off and transferred to a _____ or _____ account

Answer 13

profit

loss

Question 14

Gains and losses are closed off to _____ accounts.

Answer 14

equity

Question 15

How is cost of sales in the perpetual system treated?

Answer 15

The COS account is updated when inventory is sold, returned by a customer, or damaged/stolen

Question 16

How is cost of sales treated in the periodic system treated?

Answer 16

There is an opening balance of inventory, then the temporary ‘purchases’ account is used followed by a closing balance for inventory.

Question 17

What if inventory had been stolen in the perpetual system?

Answer 17

DR COS expense 1000
CR Inventory 1000

The entry ensures that the final balance on the inventory account agrees with the physical inventory counted

Question 18

What if inventory had been stolen in the periodic system?

Answer 18

No additional journal entry is required; as the inventory will not be in closing stock and therefore cost of sales will automatically be higher.

Question 19

What if inventory was damaged or obsolete?

Answer 19

Inventory must then be shown at the LOWER of cost or Net realisable value (NRV), i.e inventory must be “written-down” if needed

Question 20

How are write down entries shown using the perpetual system?

Answer 20

DR COS expense

CR Inventory

Question 21

How are write down entries shown using the periodic system?

Answer 21

DR COS expense

CR Inventory

Question 22

When would there not be a journal entry using the periodic system?

Answer 22

If the change had already been made to closing inventory on the inventory sheet, before year end adjustments.

Question 23

Are closing entries identical for both the perpetual and periodic systems? (Provide the JE’s)

Answer 23

Yes, identical for closing JE’s

DR Sales income
CR Profit/Loss

DR Profit/Loss
CR COS expense

Question 24

Provide the Formula for NRV

Answer 24

NRV = Amount of sale - cost to repair