Keeping track of a whole company's financial transactions can quickly become difficult and confusing. For this reason, many companies often outsource financial accounting instead of using their own accountants. These days, we have received a variety of questions about Inventory.
We can say that Inventory, cost of goods sold are probably the most complicating concepts which bookkeepers have to tackle. In today’s article, S4B will delve into one of ư 2 inventory systems that make your bookkeeping effectively: Perpetual System.
According to Accounting Dictionary, Inventory is “assets that are intended to be sold in the ordinary course of business, include:
Be held for sale in the ordinary course of business
Be in the process of being produced for sale
The materials or supplies are intended for consumption in the production process.”
In particularly, Inventory items can be classified into 4 categories: Raw materials, Goods/ Merchandise inventories, Finished Goods, Work in process.
2. Perpetual Inventory System
Perpetual System, which is known as continuous system, is a system where a business keeps continuous, moment-to-moment records of the number, value and type of inventories. In other words, under the perpetual inventory system, a company continually updates its inventory records to accounts for additions to and subtractions from inventory for such activities as:
• Goods sold from stock
• Items scrapped
• Received inventory items
• Items are picked from inventory for use in the production process
• Items are moved from one location to another
The perpetual inventory system journal entries show the debit and credit account together with a brief narrative. In particular, there is a Cost of Goods Sold account which is debited at the time of each sale for the cost of the product that was sold. A sale of merchandise will result in two journal entries: one to increase (credit) the sale and the cash or receivable account, and one to reduce (debit) inventory and also to increase the value of the cost of goods sold.
The accuracy of the balance in inventory account at the end of the accounting period is periodically assured by a physical count – one person counts the remained number of merchandise in warehouse one by one. If a difference is found between the balance in inventory account and the figure by physical count, it is corrected by making a suitable journal entry.
Traditionally, this inventory system seemed to be a time – consuming method to measure the merchandise in the warehouse and was used by companies that buy and sell easily identifiable inventories such as jewelry, clothing ….. It is impossible to manually update and maintain the records to the general ledger and inventory journal for a perpetual inventory system because there are thousands of transactions in an accounting period. However, nowadays, with a computer and advanced software, all businesses, especially supermarket chains, get used to this system.
So what questions do you still have about inventory? Contact us now for more information. S4B believes that our customers want to feel valued and expect us to show it through qualified services. Your benefit is our responsibility!