Recording inventory in the General ledger Flashcards
How do huge companies manage inventory? (2)
- Barcodes scanned as purchased- inventory increases
2. As sold products scanned, inventory decreases
What method of recording do huge companies use?
The perpetual method
What do smaller businesses do?
- They only record purchases of inventory from supplier and returns of inventory to supplier throughout the financial year
- Calculate COS periodically (at the end of the financial year/period
Define perpetual
occurring repeatedly; so frequent as to seem endless and uninterrupted
Define periodic
appearing or occurring at intervals
What account does the periodic system use instead of the Inventory account that the perpetual system uses?
The periodic system uses a temporary “purchases account”
What happens to this “purchases account”?
- It doesn’t appear on the financial statements
2. Gets closed off at year end
How would the return of inventory look on the perpetual system?
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
What would the return of inventory look like on the periodic system and why?
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
What is the “stock count” on the periodic system?
The stock count is the on hand inventory at the end of the year
What is the most vital formula in the inventory section/
Cost of sales = opening inventory + purchases - closing inventory
What are adjusting journal entries?
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.
Income and expense accounts are closed off and transferred to a _____ or _____ account
profit
loss
Gains and losses are closed off to _____ accounts.
equity
How is cost of sales in the perpetual system treated?
The COS account is updated when inventory is sold, returned by a customer, or damaged/stolen
How is cost of sales treated in the periodic system treated?
There is an opening balance of inventory, then the temporary ‘purchases’ account is used followed by a closing balance for inventory.
What if inventory had been stolen in the perpetual system?
DR COS expense 1000
CR Inventory 1000
The entry ensures that the final balance on the inventory account agrees with the physical inventory counted
What if inventory had been stolen in the periodic system?
No additional journal entry is required; as the inventory will not be in closing stock and therefore cost of sales will automatically be higher.
What if inventory was damaged or obsolete?
Inventory must then be shown at the LOWER of cost or Net realisable value (NRV), i.e inventory must be “written-down” if needed
How are write down entries shown using the perpetual system?
DR COS expense
CR Inventory
How are write down entries shown using the periodic system?
DR COS expense
CR Inventory
When would there not be a journal entry using the periodic system?
If the change had already been made to closing inventory on the inventory sheet, before year end adjustments.
Are closing entries identical for both the perpetual and periodic systems? (Provide the JE’s)
Yes, identical for closing JE’s
DR Sales income
CR Profit/Loss
DR Profit/Loss
CR COS expense
Provide the Formula for NRV
NRV = Amount of sale - cost to repair
