ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Accounting: Perpetual v. Periodic 0 Views
Share It!
Transcript
- 00:00
Accounting Allah shmoop perpetual versus periodic Okay so here were
- 00:08
going to frame the two key methods in which inventory
- 00:12
is held or accounted for in the Western world the
- 00:15
two basic religions therein are called periodic on the one
- 00:19
hand and perpetual on the other In a periodic management
Full Transcript
- 00:23
system inventory is assessed and then updated at a specific
- 00:26
point in time I each quarter like the number of
- 00:29
units packaged Barbie's goes up and down in any given
- 00:32
quarter about her value might also go up and down
- 00:36
and in other products or industries where things spoil like
- 00:39
think eggs That inventory has a spoilage number a catch
- 00:42
to it as well OK in a perfect jewel system
- 00:46
inventory is updated each time a transaction happens For example
- 00:51
when a giant load of two hundred bike frames comes
- 00:53
into your shop you would then update the inventory at
- 00:56
that time Another shipment might come in the next day
- 00:59
or not for a year but you would be essentially
- 01:02
perpetually updating your inventory under that structure All right so
- 01:06
how would you record the receipt of two hundred bike
- 01:09
frames which cost a hundred bucks each Well here is
- 01:12
where the creative artistry of accounting comes into play The
- 01:15
bikes cell for five hundred bucks each The frame's tire
- 01:19
brakes and labor to assemble a mall combined cost about
- 01:22
two hundred fifty bucks a bike Could we claim that
- 01:24
the frame's really make the bike Could we claim that
- 01:28
Were it not for our awesome frames none of these
- 01:30
bikes would sell and that the frame's really you're worth
- 01:33
three hundred dollars in a five hundred dollars sale Don't
- 01:37
be kind of weird but well we probably could And
- 01:39
we won't hear though because just make it sounding really
- 01:42
complex But some companies do shenanigans like that Okay the
- 01:45
goal here is to simply illustrate inventory management and note
- 01:49
that conveniently the selling price the bikes is exactly double
- 01:52
their cost to make So when we sell one bike
- 01:54
with a frame inside of it that costs one hundred
- 01:56
dollars like the frame was one hundred dollars were going
- 01:58
to claim that upon the sale we have I've turned
- 02:00
the value of that hundred dollar frame cost to us
- 02:03
into being worth two hundred dollars right Because we're doubling
- 02:06
everything on the sails like magic different man moving on
- 02:10
so also note that in this transaction we're assuming that
- 02:12
the two hundred fifty dollars in cost for that bike
- 02:14
is in average number over a given period of a
- 02:17
year or even a few years which includes building rental
- 02:20
insurance returns and any other overhead items not reflected by
- 02:23
the unit cost of buying each tire or frame individually
- 02:27
By the same token we're not worrying about commission for
- 02:29
the sales People who actually sold the bike and we're
- 02:32
viewing the five hundred dollars sale is a net to
- 02:34
US five hundred bucks So in accounting for the receipt
- 02:37
of the two hundred bike frames which cost the company
- 02:39
twenty thousand dollars right a hundred bucks two hundred there
- 02:42
are two separate entries that then need to be made
- 02:45
The first records the actual sale noting whether it was
- 02:49
done for cash that day or as a Credit Sale
- 02:52
III where the bike company loans the customer money to
- 02:54
buy the bike but which the customer then agrees to
- 02:57
fully payoff in sixty days when the sale is paid
- 03:00
in cash Well the cash account of the bike company
- 03:03
is simply debited for an increase of five hundred bucks
- 03:05
into their cash account Easy if the sale is made
- 03:08
on credit than five hundred dollars would be debited into
- 03:11
the accounts receivable asset line of the balance sheet And
- 03:14
it would go away once the customer actually paid her
- 03:17
bill So those were the balance sheet entries that matter
- 03:20
here But there's also an income statement entry that has
- 03:23
to be made It comes in the form of simply
- 03:25
incremental the revenue line by five hundred bucks Right We
- 03:28
sold another bike five hundred bucks in the till at
- 03:30
the same time Again applying are always and forever double
- 03:33
entry bookkeeping Offsetting this sale would be a debit to
- 03:36
the cost of goods sold Line on the income statement
- 03:39
Well in this case the actual cost of goods sold
- 03:41
The bicycle was not five hundred dollars In fact it
- 03:43
was two hundred fifty dollars So what you would see
- 03:45
in the journal entries covering the income statement would be
- 03:48
a dab it of two fifty and cost a good
- 03:50
sold But it would have to be offset by a
- 03:52
decrease in the value the company is holding for its
- 03:55
inventory of two hundred fifty bucks rights You have one
- 03:58
less bike It cost you to fifth So yeah you
- 04:00
get rid of it If you put together these two
- 04:02
sets of transactions and apply you know math You'll know
- 04:06
that the company made a pre tax profit of two
- 04:08
hundred fifty dollars on the sale of five hundred dollars
- 04:10
bike which cost it to fifty So what would happen
- 04:12
if the bicycle is instead sold on account rather than
- 04:15
as a direct cash transaction Employment sale Well in this
- 04:19
case we'd simply debit that five hundred dollars to the
- 04:21
accounts receivable line credit five hundred of the revenue line
- 04:24
and everything would live there until the biker paid off
- 04:27
her bill At which time Well this account receivable revenue
- 04:30
for revenue thing really would be offset and would simply
- 04:33
go away So yeah Periodic inventory updated at regular intervals
- 04:38
You know like quarterly or you'd look att ball The
- 04:40
inventory you have and you kind of update an average
- 04:42
perpetual inventory updated after every transaction All right An easy
- 04:47
way to remember the difference Well this is what a
- 04:49
perpetual table of elements uh would look like Sorry
Up Next
What do you get when the guy who wrote “The Raven” makes a serious effort to write in verse? Poe-try… Now, when you’ve detached your eyes f...
Related Videos
Incidents in the Life of a Slave Girl, abridged. Ready? Go.
Emily Dickinson: Along with Van Gogh, proof that you’re never really famous until you’re dead.
So the revolution was pushed along by… pamphlets? Sure, what the heck, let’s go with it.
We’ll take one order of liberty, but hold the death.