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Under a perpetual inventory system10/11/2023 Sales Return: The recording of sales return also requires two journal entries. The two journal entries are shown below: Accounts Receivable The first one records the sale value of inventory and the second one records the cost of goods sold and reduces the inventory balance. Inventory Sale: A transaction of sale is recorded via two journal entries in perpetual inventory system. Purchase Return: When inventory purchased is subsequently returned to the supplier, the journal entry is to debit accounts payable or accounts receivable and credit inventory account. Purchase Discount: Purchase discount will reduce the inventory directly. The journal entry is shown below: Inventory Inventory Purchase: Under perpetual inventory system, a purchase is recorded by debiting inventory account and crediting accounts payable assuming that the purchase is on credit. Here we will learn the journal entries which are typical to a perpetual inventory system:įollowing are the journal entries under perpetual inventory system assuming that sales and purchases are recorded net of discount (to learn more, see gross vs net method of inventory purchase recording and discount on sales.). We have already discussed the basic concept of perpetual inventory system in the comparison of perpetual-periodic inventory. Although physical inventories can’t be eliminated, their number can be reduced under optimal circumstances.Under perpetual inventory system, inventory and cost of goods sold are updated for each sale/purchase and return transaction. Due to the eventual need to “count stuff,” a physical inventory, at least on an annual basis, is prudent if not absolutely necessary. (However, larger companies or those with multiple locations may see a cost savings.) For a small company with limited inventory and small margins, a perpetual system may not be affordable or even necessary. Updates to all of the above are part of the ongoing cost of maintaining a perpetual system. Perpetual inventory systems are expensive, especially on the front end, due to the cost of equipment, software, and training. Hacking threatens the security and accuracy of all data and information and forces the implementation of cybersecurity measures that can be expensive. Perpetual Inventory System is an inventory management method which employs a computerized-based point-of-sale technological system to record real-time. Computer systems, despite their speed and efficiency, are susceptible to malfeasance in the form of hacking. When this happens, tracking the company’s goods and inventory in the warehouse or store will hamper business operations. Scanning errors, misplacement of product, software malfunction, or operator (employee) errors can degrade the efficiency of a perpetual inventory system. When the estimated perpetual inventory does not match up to a subsequent physical inventory, that discrepancy equates to a loss. This can occur due to damage, spoilage, and theft, among other reasons. Do they tie up employees’ time, even close stores on a frequent basis, to conduct inventories and gain accuracy, or do they opt for less frequent stock counts and sacrifice up-to-date data? A perpetual inventory system eliminates those problems. Businesses that rely solely on periodic physical inventories have difficult decisions to make.
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