When a perpetual inventory system is used what account does the company debit when it purchases inventory on account?

What Is Perpetual Inventory?

Perpetual inventory is an accounting method that continuously records inventory changes in real time with computerized point-of-sale systems, removing the need for physical inventory checks. It provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, and accurately reflects the level of goods on hand.

Table of Contents Show

What Is Perpetual Inventory?
Key Takeaways
Understanding Perpetual Inventory
How Perpetual and Periodic Inventory Systems Work
Factoring in Economic Order Quantity
Examples of Inventory Costing Systems
Definition of Purchases and Inventory
Which accounts are debited in perpetual inventory system?
When using the perpetual inventory system what account is used for purchase of inventory?
When you purchase inventory which account is debited?
What account is debited when recording a inventory purchase using the perpetual inventory system?

Within this system, a company makes no effort at keeping detailed inventory records of products on hand; rather, purchases of goods are recorded as a debit to the inventory database. Effectively, the cost of goods sold includes such elements as direct labor and materials costs and direct factory overhead costs.

A perpetual inventory system is distinguished from a periodic inventory system, a method in which a company maintains records of its inventory by regularly scheduled physical counts.

Key Takeaways

Perpetual inventory systems track the sale of products immediately through the use of point-of-sale systems.
The perpetual inventory method does not attempt to maintain counts of physical products.
Perpetual inventory systems are in contrast to periodic inventory systems, in which reoccurring counts of products are utilized in record-keeping.

Perpetual Inventory

Understanding Perpetual Inventory

A perpetual inventory system is superior to the older periodic inventory system because it allows for immediate tracking of sales and inventory levels for individual items, which helps to prevent stockouts. A perpetual inventory does not need to be adjusted manually by the company's accountants, except to the extent it disagrees with the physical inventory count due to loss, breakage or theft.

How Perpetual and Periodic Inventory Systems Work

A point-of-sale system drives changes in inventory levels when inventory is decreased, and cost of sales, an expense account, is increased whenever a sale is made. Inventory reports are accessed online at any time, which makes it easier to manage inventory levels and the cash needed to purchase additional inventory.

A periodic system requires management to stop doing business and physically count the inventory before posting any accounting entries. Businesses that sell large dollar items, such as car dealerships and jewelry stores, must frequently count inventory, but these firms also maintain a point-of-sale system. The inventory counts are performed frequently to prevent theft of assets, not to maintain inventory levels in the accounting system.

Factoring in Economic Order Quantity

Using a perpetual inventory system makes it much easier for a company to use the economic order quantity (EOQ) to purchase inventory. EOQ is a formula managers use to decide when to purchase inventory, and EOQ considers the cost to hold inventory, as well as the firm’s cost to order inventory.

Examples of Inventory Costing Systems

Companies can choose from several methods to account for the cost of inventory held for sale, but the total inventory cost expensed is the same using any method. The difference between the methods is the timing of when the inventory cost is recognized, and the cost of inventory sold is posted to the cost of sales expense account. The first in, first out (FIFO) method assumes the oldest units are sold first, while the last in, first out (LIFO) method records the newest units as those sold first. Businesses can simplify the inventory costing process by using a weighted average cost, or the total inventory cost divided by the number of units in inventory.

Definition of Purchases and Inventory

When a company uses the periodic inventory system the amount of the company's inventory is determined by a physical count at the end of the accounting year. Throughout the year the general ledger account Inventory is dormant and contains only the cost of the prior year's ending inventory. With the periodic inventory system, the costs of additional purchases of goods are debited to the temporary account Purchases. (There will also be temporary accounts that will be credited for Purchase Returns and Allowances and for Purchase Discounts.)

When a company uses the perpetual inventory system, the general ledger account Inventory is continually being updated for all the purchases and sales of goods:

The costs of the goods purchased are debited to Inventory
The costs of the goods that were sold are credited to Inventory and are debited to the income statement account Cost of Goods Sold
The costs of purchase returns, purchase allowances, and purchase discounts are credited to Inventory

Companies often have sophisticated inventory systems outside of its general ledger. As a result, a company may find it advantageous to use the periodic inventory system in its general ledger (instead of the perpetual inventory system) especially when it uses the LIFO cost flow assumption for valuing its inventory and cost of goods sold.

Which accounts are debited in perpetual inventory system?

The inventory system where purchases are debited to the inventory account and the inventory account is credited at the time of each sale for the cost of the goods sold. Hence, the balance in the inventory account is constantly or perpetually changing.

When using the perpetual inventory system what account is used for purchase of inventory?

When a company uses the perpetual inventory system, the general ledger account Inventory is continually being updated for all the purchases and sales of goods: The costs of the goods purchased are debited to Inventory.

When you purchase inventory which account is debited?

Buy merchandise. You buy $1,000 of goods with the intention of later selling them to a third party. The entry is a debit to the inventory (asset) account and a credit to the cash (asset) account.