The principal systems for determination of physical quantities and the valuation of inventory
----- 1. Periodic inventory system
----- 2. Perpetual inventory system
Periodic inventory system
Quantity and value of inventory determined only at the end of the accounting period after taking a physical count of the inventory.
Also known as “Annual Stock Taking”. Cost of goods sold (COGS) is a residual figure and is obtained as follows:
COGS =Opening stock + total purchases - closing stock
Quantity and value of inventory not known on a continuous basis No accounting is done for shrinkage, losses, theft, and wastage Assumes materials not in stock have been used.
Perpetual Inventory System
Records the balance of inventory after every receipt and issue to facilitate regular checking and to avoid closing down the firm for stock-taking.
Also known as continuous inventory system. There is continuous physical stock-taking throughout the year and physical stocks are verified and compared with the balances recorded in stock registers (bin cards and stores ledger).
The closing inventory is calculated as a residual figure, ascertained as follows:
Closing Stock = Opening Stock + Purchases – Cost of goods sold