MERCHANDISING INVENTORIES

Two approaches are used in accounting for merchendising inventory.

1. Periodic inventory system
2. perpetual inventory system

Periodic inventory system:

In periodic inventory system no effort is made to keep up-to-date record of either the inventory or the cost of goods sold.Because these amounts are determined only periodically usually at the end of each year.

Following are the factors suggesting a periodic inventory system 

• Small companies, run by owner
• accounting records of inventories and specific product sales not needed in daily operations;such information developed primarily for use in annual income tax returns.
• inventory with many different kinds of  low-cost items.
• high volume of sales transactions and a manual accounting system.
• All merchandise stored at the sale site (for example , in the store)

Perpetual inventory system:

• large companies with professional management.
• management and employees wanting information about items in inventory and the quantities of specific products that are selling.
• items in the inventory with a high per unit cost.
• low volume of sales transactions or a computerized accounting system.
• merchandise stored at multiple locations or in warehouses separate from the sale site.

           JOURNAL ENTRIES FOR PERPETUAL AND PERIODIC INVENTORY SYSTEM

Event	Perpetual system	Periodic system
Purchase/acquiring merchandise inventory	Inventory             Account payable/cash	Inventory             Account payable/cash
Sale of inventory	1.      Account receiveable/cash                                         Sales      (at invoice price)   ____________________ 2.      cost of goods sold                          inentory         (at cost price)	Account receiveable/cash                                        Sales
Closing entries	Cost of goods sold                        Inventory   (shrinkage amount)	Cost of goods sold               purchase               Inventory(opening balance)  _________________ Inventory         Cost of goods sold