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Perpetual method

Under this method, the inventory account is recorded each time an addition to the inventory or withdrawal from the inventory occurs. The increase in the inventory account is through the purchase of goods at cost from suppliers and the reduction in inventory is through the sale at cost of goods to customers. The inventory account is therefore continuously updated.

This process of continuous updating obviates the need for the business to close down for regular stock taking. However, frequent checking should be carried out to ensure written records such as bin cards tally with their actual quantity in stock. If there are any discrepancies, they should be rectified immediately. The perpetual method allows the inventory balance to be updated and available at any time as can be seen from the following.

Journal entries:

Date Accounts Folio Debit Credit



$ $
20XX



Mar 31 Inventory
1,200

Trade Creditors

1,200

(Purchases for month of March)







Apr 30 Trade Debtors
1,560

Sales

1,560

(Credit sales for month of April)


" Cost of Goods Sold
1,300

Inventory

1,300

(Reduction in inventory due to sales)







May 31 Trade Creditors
1,600

Cash

1,600

(Payment made for credit purchases)







Jun 30 Inventory
1,700

Trade Creditors

1,700

(Purchases for month of Jun)







Jul 31 Trade Debtors
2,760

Sales

2,760

(Credit sales for month of July)


" Cost of Goods Sold
2,300

Inventory

2,300

(Reduction in inventory due to sales)







Sep 30 Inventory
2,100

Trade Creditors

2,100

(Purchases for month of Sep)







Oct 31 Trade Debtors
3,360

Sales

3,360

(Credit sales for month of October)


" Cost of Goods Sold
2,800

Inventory

2,800

(Reduction in inventory due to sales)







Nov 30 Trade Creditors
2,200

Cash

2,200





Dec 31 Sales
7,680

Profit and Loss

7,680

(Being transfer of year's sales)



Inventory/Stock Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX



Jan 01 Balance b/d
4,600
Apr 30 Cost of goods sold
1,300
Mar 31 Trade creditors
1.200
Jul 31 Cost of goods sold
2,300
Jun 30 Trade creditors
1,700
Oct 31 Cost of goods sold
2,800
Sep 30 Trade creditors
2,100
Dec 31 Balance c/d
3,200












9,600



9,600










Trade Creditors Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


May 31 Cash

1,600
Jan 01 Balance b/d

2,300
Nov 30 Cash
2.200
Mar 31 Inventory

1,200
Dec 31
Balance c/d

3,500

Jun 30 Inventory

1,700





Sep 30 Inventory

2,100












7,300



7,300










Trade Debtors Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Jan 01 Balance b/d

2,300

Dec 31 Balance c/d

9,980
Apr 30 Sales

1,560





Jul 31
Sales

2,760





Oct 31
Sales

3,360

















9,980



9,980










Sales Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Dec 31 Profit and Loss

7,680

Apr 30 Trade Debtors

1,560





Jul 31 Trade Debtors
2,760





Oct 31 Trade Debtors
3,360





















7,680



7,680










Cost of Goods Sold Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX







Apr 30 Inventory

1,300
Dec 31 Trading Account

6,400
Jul 31 Inventory

2.300




Oct 31
Inventory

2,800

















6,400



6,400









The above accounts under the perpetual method show:

  • that the opening and closing balances in the inventory account need not be transferred to the Cost of Goods Sold account;
  • that goods purchased are not posted to a purchases account which is usually the case. Instead, they are debited to the inventory account, so no purchases account is necessary.


A cost of goods sold account is maintained under this method. Whenever a sale is made, two journalized entries are required.

Journal entries

Date Account Folio Debit Credit



$ $
20XX



Dec 31 B Bonaparte/Cash
500

Sales

500

(Being credit/cash sale)


" Cost of goods sold
400

Inventory

400

(Reduction in stock due to sale)



Trading and Profit and Loss Account for the year ended 31 December 20XX

Sales
7,680
Less: Cost of goods sold:


Opening stock 4,600

Purchases 5,000


9,600

Less: Closing stock 3,200 6,400
Gross Profit
1,280
Less: Expenses


Under the perpetual system, purchases returns, sales returns and discounts are posted to the inventory account, and not to separate accounts. Hence, the balance in the inventory account is always up to date and accurate. Usually, two journal entries are written up for each return or discount.

An example: journalized entries showing sales returns/returns inwards

Date Accounts Folio Debit Credit



$ $
20XX



Apr 30 Sales Returns/Returns Inwards

160

King Kong & Co


160

(Being return of damaged goods)


"
Inventory

1,560

Cost of Goods Sold

1,560

(Adding back returned goods to inventory)



Last Updated (Saturday, 09 October 2010 19:58)