6.01 Inventory Control Systems

Understand Inventory Control Methods

PowerPoint #2

Perpetual Inventory SystemInventory is continuously updated.Used by a majority of businessesWhen new merchandise is purchased, the Inventory

Account ,not the Purchases Account, is immediately debited.

There are two journal entries when goods are sold: The items are immediately removed from the Inventory

Account and placed in the Cost of Good Sold Account. The sale is credited to Sales and debited to Cash or Accounts

Receivable.A stock record is used to show the type of

merchandise, quantity received, quantity sold, and balance on hand.

Types of Inventory Control Systems - Perpetual

Periodic Inventory SystemAlso called a physical inventoryDetermined by physically counting, weighing,

or measuring items or merchandise on handAs inventory is purchased, it is debited to the

Purchases account. Purchases account is shown in the Cost of Goods

Sold section Purchases account is closed to the Inventory Account

at the end of the year.

Types of Inventory Control Systems - Periodic

When merchandise is sold to customers There is only one journal entry. Debit Cash or Accounts Receivable and Credit Sales. No adjustment to Inventory or Cost of Goods Sold is

needed. The adjustment will be made at the end of the year.

Inventory Records are used to record information for Periodic Inventories.

Periodic Inventories are expensive to conduct, especially for businesses with large inventories.

Companies that use the Perpetual Inventory system take a Physical Inventory as least once per year.

Types of Inventory Control Systems – Periodic (cont’d)

Explain the concept of a Perpetual Inventory system.

Explain the concept of a Periodic Inventory system.

How does the Perpetual Inventory system differ from the Periodic Inventory system?

How are the two systems similar? Why is a Periodic or Physical Inventory

necessary, even for Perpetual systems?

Questions for Understanding/Discussion