Principle of Accounting: BA. in International Business Foreign Trade University

Principle of Accounting
Chapter 8
The Perpetual Inventory System
BA. in International Business

Foreign Trade University
Outline
What is inventory?
The physical stocktake
Perpetual inventory system
The stock control account
Double-entry under the perpetual
method
The cost price of sales
FIFO stock valuation
Outline (Contd)
The role of stock cards
Stock cards and the general ledger
Stock losses and stock gains
Recording stock losses and gains
From stock cards to journals
What is inventory?
Inventory: The goods that a trading firm
buys and sells.

A trading firm buys its inventory and sells
it at a higher price in order to earn
revenue.
Exclude from inventory: non-current
assets.
The physical stocktake

Perform at least once every
reporting period.
To determine the actual amount of
inventory on hand at a given date.
The value of inventory, as
determined by the physical
stocktake, is included in the
balance sheet as a current asset.
The physical stocktake (Contd)

Two processes of a physical stocktake:
1. Count the number of units of each type
of inventory.
2. Determine the cost price of each of these
units to calculate the total value of stock
on hand.
Stock sheets are used to record the details
of a physical stocktake.
Stock sheet
Stock item
Quantity
Cost
AB cricket bats
50
40
2,000
VCA cricket balls
100
18
1,800
Mitre soccer balls
30
22
660
Kooka hockey sticks
15
16
240
Total stock on hand
Value
4,700
Perpetual inventory
The inventory account is updated
every time stock moves in or out
of the business.
Perpetual inventory (Contd)

Disadvantages:
1. Additional record-keeping
Increase workload, increase in

staff.
2. Additional costs
Staff costs, costs of computer

package to maintain inventory
records.
3. The need for a physical stocktake at
the end of the reporting period is not

eliminated.
Perpetual inventory (Contd)

Advantages:
1. Greater control over stock
2. Slow-moving and fast-moving lines
of inventory can be identified.

3. Reordering of inventory is more
efficient.
4. Interim profit reports can be
prepared without doing a stock take.
5. The level of stock losses or gains
can be measured.

The stock control account is used
to record all movements of

inventory.
Debit side: records purchases of stock
Credit side: records sales of stock
The balance of the stock control
a/c represents the total cost of

stock on hand at that particular
point in time.

(Contd)
Stock control account
Increases in inventory
are caused by:
Decreases in inventory
are caused by:
Purchasing goods
Selling goods
Stock gains
Stock losses
Double-entry under the

perpetual
method
A summary
Transaction
Journal
Source documents Double -entry
Bought
goods for
cash
Cash
payments
Cheque (butt)
Stock control
Cash at bank
Dr
Cr
Bought
goods on
credit
Credit
purchases
Invoice (original)
Stock control
Creditors
Dr
Cr
Sold goods
for cash
Cash
receipts
Receipt (copy)
Cash at bank
Sales
Cost of sales
Stock control
Dr
Cr
Dr
Cr
Sold goods
on credit
Credit sales
Invoice (copy)
Debtor
Sales
Cost of sales
Dr
Cr
Dr
Identifying the cost price of

sales
Four methods:
Identified cost
First-in-first-out (FIFO)
Last-in-first-out (LIFO)
Weighted average cost
First-in-first-out stock
valuation
Assumes that the first inventory
purchased is the first inventory

sold.
Firms normally try to keep stock
moving in line with purchases dates
to prevent old items from being
shop-soiled, outdated.
FIFO - Example
Purchases
Date
Sales
Lot No
Qty
Unit
cost
Total
Date
Qty
Unit SP
Jan 1
50
6.0
300
Jan 4
40
12.0
50
6.2
310
30
12.5
13
50
6.5
325
18
20
12.5
24
50
6.6
330
31
50
12.9
Total
200
1,265
140
FIFO Example (Contd)

Cost of sales
Quantity
Unit cost
Stock on hand
Value
Quantity
Unit cost
Value
50
6.0
300
10
6.5
65
50
6.2
310
50
6.6
330
40
6.5
260
60
140
870
395
The stock card

A form of subsidiary ledger that is
used to record the financial

transactions of one particular item
of inventory.
Stock card An example

Stock item: Sony 30cm colour TV
Product code: STV84920030
Supplier: Wholesale Electricals
Location: West 15
Valuation method: FIFO
Date
Reference
IN
Qty
Cost
OUT
Value
Qty
Cost
BALANCE
Value
Jul 1 Balance
2 Inv.92843
10
190
1900
3 Rec.8743
4 Inv.1001
5 Rec. 8748
6 Inv.92877
10
190
1900
180
360
Qty
Cost
Value
180
900
180
10
190
180
10
190
2,440
2,800
180
540
190
380
190
1,520
190
570
190
950
15
190
2,850
Stock cards and the general

ledger
General ledger
Subsidiary ledger
Stock cards
A summary of inventory
Many individual records
Total of journals are
Not part of double-entry
posted periodically
No individual details of
Updated continuously
stock items
throughout the period
Schedule of stock cards

Inventory description
Product code
Sony 30cm TV
STV84920030
15
190
2,850
Sony 45cm TV
STV84020219
10
270
2,700
Kembrook VCR
KM843437890
12
250
3,000
Kembrook CD player KM843929232
20
150
3,000
Balance of stock control ledger account
Qty
Cost
Value
11,550
Stock losses and stock gains

A stock loss
Balance per physical stocktake <
Balance in the stock cards.
A stock gain
Balance per physical stocktake >
Balance in the stock cards.
Reasons for stock losses

Undersupply by suppliers
Oversupply to customers
Theft
Recording errors in the stock cards
Double invoicing by supplier
Stocktaking errors
Reasons for stock gains

Oversupply by suppliers
Undersupply to customers
Recording errors in the stock cards.
Stocktaking errors.
Recording stock losses

Stock item: Sony 30cm colour TV
Product code: STV84920030
Supplier: Wholesale Electricals
Date
Reference
IN
Qty
Cost
OUT
Value
Qty
Cost
BALANCE
Value
Jun 1 Balance
Qty
Cost
Value
10
1500
15000
4 Inv.645
1500
3000
1500
12000
9 Inv.646
1500
4500
1500
7500
1500
12
1600
1500
12
1600
1500
12
1600
15 Inv.13212
25 Inv.672
30 Stock loss
12
1600
19200
1
1
1500
1500
1500
1500
26700
25200
23700
Recording stock losses

General journal
Date
Accounts
Debit
Jun 30
Stock loss
1,500
Stock control
Credit
1,500
Adjusting entry to decrease stock

control to value of physical stocktake
Jun 30
Balance
40,000
Jun 30
Stock loss account

Jun 30
Stock control
1,500
Stock loss
1,500
Recording stock gains

Stock item: Classic Coffee Machine
Product code: CCM4300
Supplier: Gilly Buyatt
Date
Ref
IN
Qty
Cost
OUT
Value
May 27 Inv.43255
28
30
31 Stock gain
Qty
4
2
42
84
BALANCE
Cost
Value
Qty
Cost
40
200
25
40
28
42
23
40
28
42
19
40
28
42
19
40
30
42
40
40
80
160
Value
2,176
2,096
1,936
2,020
Recording stock gains

General journal
Date
Accounts
Debit
Jun 30 Stock control
Credit
84
Stock gain
84
Adjusting entry to increase stock

control to value of physical stocktake
May 31
Balance
May 31
Stock gain

25,000
84
Stock gain account
May 31 Stock control
84
Practice questions
Exercise 8.1
Exercise 8.2
Exercise 8.3
Exercise 8.10
Homework
Exercise 8.11

Principle of Accounting: BA. in International Business Foreign Trade University

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Principle of Accounting: BA. in International Business Foreign Trade University

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Principle of Accounting

BA. in International Business

buys and sells.

The physical stocktake

The physical stocktake (Contd)

VCA cricket balls

Mitre soccer balls

Kooka hockey sticks

Total stock on hand

Perpetual inventory (Contd)

Increase workload, increase in

Staff costs, costs of computer

the end of the reporting period is not

Perpetual inventory (Contd)

of inventory can be identified.

The stock control account

to record all movements of

The balance of the stock control

a/c represents the total cost of

The stock control account

Double-entry under the

Identifying the cost price of

purchased is the first inventory

FIFO Example (Contd)

The stock card

used to record the financial

Stock card An example

Product code: STV84920030

Supplier: Wholesale Electricals

Stock cards and the general

Stock control account

Many individual records

Total of journals are

Not part of double-entry

throughout the period

Schedule of stock cards

Kembrook CD player KM843929232

Balance of stock control ledger account

Stock losses and stock gains

Reasons for stock losses

Reasons for stock gains

Recording stock losses

Product code: STV84920030

Supplier: Wholesale Electricals

Valuation method: FIFO

Recording stock losses

Adjusting entry to decrease stock

Stock loss account

Recording stock gains

Product code: CCM4300

Supplier: Gilly Buyatt

Valuation method: FIFO

Recording stock gains

Jun 30 Stock control

Adjusting entry to increase stock

Stock control account

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