The Perpetual Method of Merchandise Accounting
As you may recall from the introduction to accounting for a merchandise business, there are two (2) methods: 1. Periodic, and 2. Perpetual
We now will learn how the perpetual method of accounting varies from the periodic method.
Essentially, you will find that the two methods differ only when the “costing” of inventory occurs.
Basis for the Perpetual Method
The name perpetual is a reference to the fact that the merchandise inventory account always shows us the value of inventory that should be on hand (e.g., it is perpetually kept up to date).
As technology becomes more and more widespread and affordable, most businesses have acquired computerized inventory and accounting systems. In fact, some computerized accounting software programs do not even support the periodic method of accounting anymore – only the perpetual!
We will learn about the Perpetual Method of accounting for a merchandise business by looking at only what changes between the Periodic Method and the Perpetual Method. The shaded regions of the accounting cycle shown below indicate the areas of change.
Once more, the two methods differ only when the “costing” of inventory occurs.
1. Journal Entries
Accounts Used in the Perpetual Method
Some of the accounts we used in the Periodic method are no longer required in the Perpetual method.
The main reason is now we track changes to the merchandise inventory account as they happen. Purchases go directly into the inventory account, and when there’s a sale, the value is taken out of the inventory account and placed into the Cost of Goods Sold expense account.
Click ‘Next’ below to see how the accounts differ between the two methods. | This is an animated image of the different accounts used between the two methods of accounting for a merchandise business. |
Generally, whenever we would have used any of the accounts listed on the left, we now use Merchandise Inventory.
As well, when we sell goods, we now record the inventory leaving our possession, and record an increase to cost of goods sold (which is now an actual account).
We will now examine the use of these accounts more closely.
(Note: all the following transactions are based on $1,000 of inventory before tax.)
A Purchase of Inventory | This is an animated image that shows the difference in the journal entries for the purchase of inventory. |
A Purchase Return | This is an animated image that shows the difference in the journal entries for the return of purchased inventory. |
A Purchase Discount | This is an animated