A merchandising company keeps track of its inventory to determine what is available for sales and what has been sold. Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic inventory system.
In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. These records continuously-perpetually-show the inventory that should be on hand for every item. For example, a Ford dealership has separate inventory records for each automobile, truck, and van on its lot and showroom floor. Similarly, a Kroger grocery store uses bar codes and optical scanners to keep a daily running record of every box of cereal and every jar of jelly that it buys and sells. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.
In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they determine the cost of goods sold only at the end of the accounting period- that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand. To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:
- Determine the cost of goods on hand at the beginning of the accounting period.
- Add to it the cost of goods purchased.
- Subtract the cost of goods on hand at the end of the accounting period.
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