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There are fundamental differences for accounting and reporting merchandise inventory transactions under the periodic and perpetual inventory systems. To record purchases, the periodic system debits the Purchases account while the perpetual system debits the Merchandise Inventory account.
Periodic inventory is a system of inventory in which updates are made on a periodic basis. This differs from perpetual inventory systems, where updates are made as seen fit. In a periodic inventory system no effort is made to keep up-to-date records of either the inventory or the cost of goods sold.
Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that can occur as a result of theft, breakage, scanning errors or untracked inventory movements, leading to systematic errors in replenishment. [2] The perpetual inventory formula is very straightforward.
Periodic is more time-consuming than perpetual. [15] Perpetual can lower the cost of carrying inventory vs. periodic. [10] Perpetual is typically more costly to run than periodic. [10] Perpetual needs to be verified from time to time against an actual physical count, due to scrap, human error, theft, and other variables. [15] [16]
Average cost method is a method of accounting which assumes that the cost of inventory is based on the average cost of the goods available for sale during the period. [1] The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale.
According to the generally accepted accounting principles (GAAP), companies can use either perpetual inventory systems or periodic inventory systems. Perpetual inventory management is a system where store balances of inventory are recorded after every transaction.
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Physical inventory is a process where a business physically counts its entire inventory.A physical inventory may be mandated by financial accounting rules or the tax regulations to place an accurate value on the inventory, or the business may need to count inventory so component parts or raw materials can be restocked.