Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Gross profit-Operating expenses= Net income (or Net loss Periodic and perpetual inventory systems Some businesses update inventory records periodically while others keep inventory up-to-date on a daily basis. a periodic inventory system provides inventory and cost of sold data only when inventory is counted (for example, at year end). This differs from the perpetual inventory system, which provides inventory and cost of goods sold data on a continuous, up-to-date basis As a result, how the purchase and sale of merchandise inventory is recorded differs between the periodic and perpetual inventory systems. For example, the periodic inventory system uses a emporary Purchases account to record the cost of merchandise purchased. When financial statements are prepared under the periodic system, the cost of goods sold and merchandise inventory are determined, in part, by conducting a physical count of inventory on-hand. In contrast a perpetual inventory system updates the merchandise inventory and Cost of goods sold accounts each time an item is purchased or sold a physical inventory count must also be performed under a perpetual system to reconcile any difference between actual merchandise on hand and the balance reported in the accounting records Advances in technology have made it feasible for a growing number of merchandisers to use a perpetual inventory system. Therefore, the perpetual inventory system of accounting is the initial focus of this lesson Merchandise purchases- Perpetual inventory system Gross purchases %, Under a perpetual inventory system, all purchases of merchandise inventory on credit are bited to the merchandise inventory account at the time of purchase as follows Merchandise inventory Accounts payable Note that net purchases differ from gross purchases. To calculate net purchases, you adjust gross purchases for any purchase discounts provided by suppliers and any purchase returns and allowances for unsatisfactory items received from suppliers Purchase returns and allowances The general format used to record the journal entry for a purchase return or purchase Accounts payable XXX Merchandise inventory X Trade discounts 2Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 2 Gross profit – Operating expenses = Net income (or Net loss) Periodic and perpetual inventory systems Some businesses update inventory records periodically while others keep inventory records up-to-date on a daily basis. A periodic inventory system provides inventory and cost of goods sold data only when inventory is counted (for example, at year end). This differs from the perpetual inventory system, which provides inventory and cost of goods sold data on a continuous, up-to-date basis. As a result, how the purchase and sale of merchandise inventory is recorded differs between the periodic and perpetual inventory systems. For example, the periodic inventory system uses a temporary Purchases account to record the cost of merchandise purchased. When financial statements are prepared under the periodic system, the cost of goods sold and merchandise inventory are determined, in part, by conducting a physical count of inventory on-hand. In contrast, a perpetual inventory system updates the Merchandise inventory and Cost of goods sold accounts each time an item is purchased or sold. A physical inventory count must also be performed under a perpetual system to reconcile any difference between actual merchandise on hand and the balance reported in the accounting records. Advances in technology have made it feasible for a growing number of merchandisers to use a perpetual inventory system. Therefore, the perpetual inventory system of accounting is the initial focus of this lesson. Merchandise purchases — Perpetual inventory system Gross purchases Under a perpetual inventory system, all purchases of merchandise inventory on credit are debited to the Merchandise inventory account at the time of purchase, as follows: Merchandise inventory XXX Accounts payable XXX Note that net purchases differ from gross purchases. To calculate net purchases, you adjust gross purchases for any purchase discounts provided by suppliers and any purchase returns and allowances for unsatisfactory items received from suppliers. Purchase returns and allowances The general format used to record the journal entry for a purchase return or purchase allowance is: Accounts payable XXX Merchandise inventory XXX Trade discounts