Perpetual Inventory - Purchasing Summary: Videos & Practice Problems

A perpetual inventory system continuously updates inventory records for every purchase and sale. This system uses a T account to track inventory, starting with the beginning balance. Additions to inventory include purchases, while subtractions include cost of goods sold (COGS), purchase discounts, and returns. The equation used is:

$\mathrm{Beginning}+\mathrm{Additions}-\mathrm{Subtractions}=\mathrm{Ending}$

This method ensures accurate financial reporting and effective inventory management by providing real-time inventory levels.

To calculate the ending balance in inventory using a perpetual system, use the equation:

$\mathrm{Beginning}+\mathrm{Additions}-\mathrm{Subtractions}=\mathrm{Ending}$

Start with the beginning balance, add purchases, and subtract COGS, purchase discounts, and returns. For example, if the beginning balance is $55,000, purchases are $25,000, purchase discounts are $650, returns are $1,500, and COGS is $40,000, the ending balance would be:

$\mathrm{55,000}+\mathrm{25,000}-650-\mathrm{1,500}-\mathrm{40,000}=\mathrm{37,850}$

In a perpetual inventory system, the main subtractions from inventory include:

• Cost of Goods Sold (COGS): The cost of inventory items sold during the period.
• Purchase Discounts: Reductions in cost when suppliers offer discounts for early payment.
• Purchase Returns: Inventory items returned to suppliers.
• Purchase Allowances: Reductions in cost due to defective or unsatisfactory inventory items.

These subtractions are recorded in the T account to continuously update the inventory balance.

A T account is useful in a perpetual inventory system because it visually represents the inventory account, making it easier to track additions and subtractions. The left side (debit) records increases such as purchases, while the right side (credit) records decreases like COGS, purchase discounts, and returns. This method helps ensure accurate and real-time updates to the inventory balance, facilitating effective inventory management and financial reporting.

In a perpetual inventory system, purchase discounts and returns reduce the inventory balance. Purchase discounts occur when suppliers offer a reduction in price for early payment, decreasing the cost of inventory. Purchase returns happen when inventory items are returned to suppliers, also reducing the inventory balance. Both are recorded as credits in the T account, ensuring the inventory balance reflects the actual cost of inventory on hand.