Inventory Systems

Perpetual and Periodic Inventory Systems
Student’s Name
Institution
Perpetual and Periodic Inventory Systems
Business organizations can utilize one of two inventory accounting systems: the periodic inventory system or the perpetual inventory system. These two systems allow a company to track the amount of goods it has on hand. This paper examines the differences between the two systems of accounting for inventory.
A key difference between the two systems relates to the recording of the cost of sales. Under the perpetual inventory system, the recording of the cost of sales is done at the date of sales. A sale made under the perpetual inventory system necessitates two entries: one recognizing the sale and the other recognizing the cost of sales. As such, there is a debiting of the cost of sales account and crediting of inventory account. On the other hand, in a periodic system, there is no recording done. This means that the entry for the cost of sales does not exist. The calculation is only done at the end of the financial period when taking a physical count to find out the cost of goods at hand (Kimmel, Weygandt, & Kieso, 2016). Therefore, a major difference between the two systems relates to how the recording of the cost of sales is done.
Another difference relates to the recording of purchases. Under a perpetual inventory system, the purchases done during the year are regarded as assets and are therefore recorded to the inventory account. On the other hand, the purchases done during the course of the year under a periodic system are regarded as expenses and therefore are debited under the purchases account. Given that the purchases are regarded as assets under the perpetual inventory system, they are reported on the balance sheet (Kimmel, Weygandt, & Kieso, 2016). On the other hand, the purchases regarded as expenses in a periodic inventory system are reported under the income statement.