Perpetual Inventory System - AccountingTools

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The Perpetual Inventory System

Perpetual Inventory System Overview

Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as received inventory items, goods sold from stock, and items picked from inventory for use in the production process. Thus, a perpetual inventory system has the advantages of both providing up-to-date inventory balance information, and requiring a reduced level of physical inventory counts. However, the calculated inventory levels derived by a perpetual inventory system may gradually diverge from actual inventory levels, due to unrecorded transactions or theft, so you should periodically compare book balances to actual on-hand quantities with cycle counting.

Perpetual Inventory Journal Entries

The following example contains several journal entries used to account for transactions in a perpetual inventory system:

1. To record a purchase of $1,000 of items that are stored in inventory:

	Debit	Credit
Inventory	1,000
Accounts payable		1,000

2. To record $250 of inbound freight cost associated with the delivery of inventory:

	Debit	Credit
Inventory	250
Accounts payable		250

3. To record a sale of goods from inventory for $2,000, for which the associated inventory cost is $1,200:

	Debit	Credit
Accounts receivable	2,000
Revenue		2,000
Cost of goods sold	1,200
Inventory		1,200

4. To record a downward inventory adjustment of $500, caused by inventory theft, and detected during a cycle count:

	Debit	Credit
Inventory shrinkage expense	500
Inventory		500