Inventory Systems
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define inventory and inventory systems
➛ Distinguish between periodic and perpetual inventory systems
➛ Record inventory transactions under each system
➛ Identify businesses that use each inventory system
➛ Understand how inventory systems affect Cost of Goods Sold
➛ Explain the impact of inventory systems on financial statements
Key Vocabulary
➛ Inventory
➛ Inventory System
➛ Periodic Inventory System
➛ Perpetual Inventory System
➛ Cost of Goods Sold
➛ Physical Count
➛ Purchases
➛ Shrinkage
What Is an Inventory System?
An inventory system determines how and when inventory quantities and costs are recorded.
Inventory systems help businesses
➛ Track goods available for sale
➛ Calculate COGS accurately
➛ Control theft and losses
➛ Prepare reliable financial statements
Types of Inventory Systems
1. Periodic Inventory System
➛ Inventory updated only at period-end
➛ COGS calculated using a formula
➛ Physical count required
➛ Used by small businesses
COGS Formula | Periodic
Beginning Inventory
+ Purchases
− Ending Inventory
= COGS
Types of Inventory Systems
2. Perpetual Inventory System
➛ Inventory updated after every transaction
➛ COGS recorded at time of sale
➛ Continuous tracking
➛ Used by supermarkets, large retailers
Comparison | Periodic vs Perpetual
Feature
Inventory updates
COGS
Physical count
Accuracy
Inventory updates
COGS
Physical count
Accuracy
Periodic
End of period
Calculated
Required
Lower
End of period
Calculated
Required
Lower
Perpetual
Continuous
Recorded immediately
Used to verify
Higher
Continuous
Recorded immediately
Used to verify
Higher
Journal Entries Comparison
Sale of Goods | Cash Sale
Periodic System
Cash
Sales Revenue
Sales Revenue
Dr
Cr
Cr
COGS recorded later
Journal Entries Comparison
Perpetual System
Cash
Sales Revenue
Cost of Goods Sold
Inventory
Sales Revenue
Cost of Goods Sold
Inventory
Dr
Cr
Dr
Cr
Cr
Dr
Cr
Identify the Inventory System
State whether Periodic or Perpetual
➛ Inventory updated at year-end only
➛ Used by supermarkets
➛ COGS calculated using a formula
➛ Inventory reduced at time of sale
➛ Requires continuous record keeping
Fill in the Blanks
1. Under a ______ inventory system, inventory is updated continuously.
2. Under a ______ inventory system, COGS is calculated at period-end.
3. Shrinkage is discovered through a ______ count.
COGS Calculation | Periodic
A business has
Choose the most appropriate action
➛ Beginning Inventory = 4,000
➛ Purchases = 12,000
➛ Ending Inventory = 3,500
Task
Calculate Cost of Goods Sold.
Journal Entry Practice
A business sells goods costing 2,000 for 3,200 cash.
Prepare journal entries under
➛ Periodic system
➛ Perpetual system
Mini Case Study
A clothing store wants to improve inventory control. Currently, it only updates inventory at the end of the year and experiences frequent stock losses.
Questions
➛ Which inventory system is the store using?
➛ What problems does this system cause?
➛ Which inventory system should the store adopt? Why?
➛ How would this change affect COGS recording?
➛ How would it improve financial reporting?
Quick Quiz
➛ What is an inventory system?
➛ Name the two main types of inventory systems.
➛ True or False | COGS is recorded only at period-end under the perpetual system.
➛ Which system provides more accurate inventory records?
➛ What formula is used to calculate COGS under the periodic system?
Answers ➧ Here
FIFO ➧ Here