Accounting: The Language of Business - Vol. 2 (Intermediate: Part 157)

• Matthew 12:36

  Jesus says, "I tell you that on the day of judgment people will have to account for every careless word they speak".

Short-Term Operating Assets: Inventory (Part C)

by

Charles Lamson 

Personal Inventory System. In practice, technological advances have made the periodic system (covered in Part 156) obsolete and provided the computer software for firms to use a perpetual system. Under a perpetual system, Firms continually update inventory accounts for each purchase and each sale. A perpetual system is superior to a periodic system because it always provides current information about inventory levels, cost of goods sold, and gross profits. 

The following t-account shows the activity in a perpetual system of inventory. Inventory increases with net purchases and is reduced when units are sold. The inventory balance is always current.

At the end of the period, a company performs a physical count of inventory. The company adjusts for the difference between the actual count and the perpetual records resulting from issues such as theft, breakage, and obsolescence. Example 10.2 illustrates accounting under a perpetual inventory system. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 510-512*

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