1. Principle of Accounting
Chapter 8
The Perpetual Inventory System
BA. in International Business
Foreign Trade University

2. Outline
 What is inventory?
 The physical stocktake
 Perpetual inventory system
 The stock control account
 Double-entry under the perpetual method
 The cost price of sales
 FIFO stock valuation

3. Outline (Cont’d)
 The role of stock cards
 Stock cards and the general ledger
 Stock losses and stock gains
 Recording stock losses and gains
 From stock cards to journals

4. What is inventory?
 Inventory: The goods that a trading firm buys and
sells.
 A trading firm buys its inventory and sells it at a
higher price in order to earn revenue.
 Exclude from inventory: non-current assets.

5. The physical stocktake
 Perform at least once every reporting
period.
 To determine the actual amount of
inventory on hand at a given date.
 The value of inventory, as determined by
the physical stocktake, is included in the
balance sheet as a current asset.

6. The physical stocktake (Cont’d)
Two processes of a physical stocktake:
2. Count the number of units of each type of
inventory.
3. Determine the cost price of each of these units
to calculate the total value of stock on hand.
Stock sheets are used to record the details of a
physical stocktake.

7. Stock sheet
Stock item Quantity Cost Value
AB cricket bats 50 40 2,000
VCA cricket balls 100 18 1,800
Mitre soccer balls 30 22 660
Kooka hockey sticks 15 16 240
Total stock on hand 4,700

8. Perpetual inventory
The inventory account is updated every
time stock moves in or out of the
business.

9. Perpetual inventory (Cont’d)
Disadvantages:
2. Additional record-keeping
Increase workload, increase in staff.
Additional costs
Staff costs, costs of computer package
to maintain inventory records.
The need for a physical stocktake at the end
of the reporting period is not eliminated.

10. Perpetual inventory (Cont’d)
Advantages:
2. Greater control over stock
3. Slow-moving and fast-moving lines of
inventory can be identified.
4. Reordering of inventory is more efficient.
5. Interim profit reports can be prepared
without doing a stock take.
6. The level of stock losses or gains can be
measured.

11. The stock control account
 The stock control account is used to
record all movements of inventory.
 Debit side: records purchases of stock
 Credit side: records sales of stock
 The balance of the stock control a/c
represents the total cost of stock on hand
at that particular point in time.

12. The stock control account (Cont’d)
Stock control account
Increases in inventory Decreases in inventory
are caused by: are caused by:
• Purchasing goods • Selling goods
• Stock gains • Stock losses

13. Double-entry under the perpetual
method – A summary
Transaction Journal Source documents Double -entry
Bought Cash Cheque (butt) Stock control Dr
goods for payments Cash at bank Cr
cash
Bought Credit Invoice (original) Stock control Dr
goods on purchases Creditors Cr
credit
Sold goods Cash Receipt (copy) Cash at bank Dr
for cash receipts Sales Cr
Cost of sales Dr
Stock control Cr
Sold goods Credit sales Invoice (copy) Debtor Dr
on credit Sales Cr
Cost of sales Dr
Stock control Cr

14. Identifying the cost price of sales
Four methods:
 Identified cost
 First-in-first-out (FIFO)
 Last-in-first-out (LIFO)
 Weighted average cost

15. First-in-first-out stock valuation
 Assumes that the first inventory
purchased is the first inventory sold.
 Firms normally try to keep stock moving
in line with purchases dates to prevent old
items from being shop-soiled, outdated.

16. FIFO - Example
Purchases Sales
Date Lot No Qty Unit Total Date Qty Unit SP
cost
Jan 1 1 50 6.0 300 Jan 4 40 12.0
6 2 50 6.2 310 9 30 12.5
13 3 50 6.5 325 18 20 12.5
24 4 50 6.6 330 31 50 12.9
Total 200 1,265 140

17. FIFO – Example (Cont’d)
Cost of sales Stock on hand
Quantity Unit cost Value Quantity Unit cost Value
50 6.0 300 10 6.5 65
50 6.2 310 50 6.6 330
40 6.5 260 60 395
140 870

18. The stock card
 A form of subsidiary ledger that is used to
record the financial transactions of one
particular item of inventory.

19. Stock card – An example
Stock item: Sony 30cm colour TV Product code: STV84920030
Supplier: Wholesale Electricals Location: West 15
Valuation method: FIFO
Date Reference IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jul 1 Balance 5 180 900
2 Inv.92843 10 190 1900 5 180
10 190 2,800
3 Rec.8743 2 180 360 3 180
10 190 2,440
4 Inv.1001 3 180 540
2 190 380 8 190 1,520
5 Rec. 8748 3 190 570 5 190 950
6 Inv.92877 10 190 1900 15 190 2,850

20. Stock cards and the general ledger
General ledger Subsidiary ledger
Stock control account Stock cards
 A summary of inventory  Many individual records
 Total of journals are  Not part of double-entry
posted periodically
 No individual details of  Updated continuously
stock items throughout the period

21. Schedule of stock cards
Inventory description Product code Qty Cost Value
Sony 30cm TV STV84920030 15 190 2,850
Sony 45cm TV STV84020219 10 270 2,700
Kembrook VCR KM843437890 12 250 3,000
Kembrook CD player KM843929232 20 150 3,000
Balance of stock control ledger account 11,550

22. Stock losses and stock gains
A stock loss
Balance per physical stocktake < Balance in
the stock cards.
A stock gain
Balance per physical stocktake > Balance in
the stock cards.

23. Reasons for stock losses
 Undersupply by suppliers
 Oversupply to customers
 Theft
 Recording errors in the stock cards
 Double invoicing by supplier
 Stocktaking errors

24. Reasons for stock gains
 Oversupply by suppliers
 Undersupply to customers
 Recording errors in the stock cards.
 Stocktaking errors.

25. Recording stock losses
Stock item: Sony 30cm colour TV Product code: STV84920030
Supplier: Wholesale Electricals Valuation method: FIFO
Date Reference IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jun 1 Balance 10 1500 15000
4 Inv.645 2 1500 3000 8 1500 12000
9 Inv.646 3 1500 4500 5 1500 7500
15 Inv.13212 12 1600 19200 5 1500
12 1600 26700
25 Inv.672 1 1500 1500 4 1500
12 1600 25200
30 Stock loss 1 1500 1500 3 1500
12 1600 23700

26. Recording stock losses
General journal
Date Accounts Debit Credit
Jun 30 Stock loss 1,500
Stock control 1,500
Adjusting entry to decrease stock
control to value of physical stocktake
Stock control account
Jun 30 Balance 40,000 Jun 30 Stock loss 1,500
Stock loss account
Jun 30 Stock control 1,500

27. Recording stock gains
Stock item: Classic Coffee Machine Product code: CCM4300
Supplier: Gilly Buyatt Valuation method: FIFO
Date Ref IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
May 27 Inv.43255 5 40 200 25 40
28 42 2,176
28 2 40 80 23 40
28 42 2,096
30 4 40 160 19 40
28 42 1,936
31 Stock gain 2 42 84 19 40
30 42 2,020

28. Recording stock gains
General journal
Date Accounts Debit Credit
Jun 30 Stock control 84
Stock gain 84
Adjusting entry to increase stock
control to value of physical stocktake
Stock control account
May 31 Balance 25,000
May 31 Stock gain 84
Stock gain account
May 31 Stock control 84

29. Practice questions
 Exercise 8.1
 Exercise 8.2
 Exercise 8.3
 Exercise 8.10

30. Homework
 Exercise 8.11