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Perpetual Vs. Periodic Inventory Systems

A company can account for changes in inventory using either periodic inventory system or perpetual inventory system.

In the perpetual system, the company maintains a continuous record of inventory changes. All the purchases and sales of inventory are directly recorded in the inventory account. For every sale, the COGS is debited and inventory is credited.

In the periodic system, the company updates inventory records only periodically. All inventory purchases are debited to purchase account. The cost of goods sold and inventory values are determined at the end of the period. At the end of the period, we add purchases to the beginning inventory to arrive at the cost of goods available for sale. Then we subtract ending inventory to calculate COGS.

Under FIFO and specific identification methods, the values for COGS and ending inventory will be same in both perpetual and periodic inventory system. However, they will differ in LIFO and average cost methods.

Example

We will use the same example of SuperMart.

Date Purchases (Sales) Balance
1 Beginning inventory (@ $3.80) 500
2 Purchased 1,500 units (@ $4.00) 2000
14 Purchased 6,000 units (@ $4.40) 8000
20 Sold 4,000 units 4000
30 Purchased 2,000 units (@ $4.75) 6000

Our earlier calculations of COGS and Ending inventory were based on periodic inventory system. We will now recalculate the same under perpetual inventory system using FIFO and LIFO methods.

FIFO Perpetual System

The COGS and Ending inventory are the same in FIFO perpetual system as in FIFO periodic system.

On June 20, 4000 units were sold. The COGS will be calculated as follows:

Units From   Cost
500 June 1 Beginning inventory 500 units * $3.80 $1,900
1,500 June 2 purchase 1,500 units * 4.00 $6,000
2,000 June 14 purchase 2,000 units * $4.40 $8,800
FIFO COGS $16,700

On June 30, there are 6,000 units in inventory. The ending inventory will be calculated as follows:

Units From   Cost
4000 June 14 purchase 4,000 units * $4.40 $17,600
2,000 June 30 purchase 2,000 units * $.75 $9,500
FIFO Ending Inventory $27,100

LIFO Perpetual System

On June 20, 4000 units were sold. The COGS will be calculated as follows:

Units From   Cost
4000 June 14 purchase 4000 units * $4.40 $17,600
LIFO COGS $17,600

On June 30, there are 6,000 units in inventory. The ending inventory will be calculated as follows:

Units From   Cost
500 June 1 Beginning inventory 500 units * $3.80 $1,900
1,500 June 2 purchase 1,500 units * 4.00 $6,000
2000 June 14 purchase 2,000 units * 4.40 $8,800
2000 June 30 purchase 2,000 units * $.75 $9,500
LIFO Ending Inventory $26,200

Note that the COGS and Ending inventory under Perpetual LIFO are different from periodic LIFO.

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