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Accounting: Perpetual v. Periodic 0 Views


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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

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

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