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Principle of Accounting Chapter 8 The Perpetual Inventory System BA. in International Business Foreign Trade University
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
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
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.
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.
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.
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
Perpetual inventory The inventory account is updated every time stock moves in or out of the business.
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.
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.
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.
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
Double-entry under the perpetualmethod – 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
Identifying the cost price of sales Four methods: Identified cost First-in-first-out (FIFO) Last-in-first-out (LIFO) Weighted average cost
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.
FIFO - ExamplePurchases SalesDate 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
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
The stock card A form of subsidiary ledger that is used to record the financial transactions of one particular item of inventory.
Stock card – An exampleStock item: Sony 30cm colour TV Product code: STV84920030Supplier: Wholesale Electricals Location: West 15 Valuation method: FIFODate 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
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
Schedule of stock cardsInventory description Product code Qty Cost ValueSony 30cm TV STV84920030 15 190 2,850Sony 45cm TV STV84020219 10 270 2,700Kembrook VCR KM843437890 12 250 3,000Kembrook CD player KM843929232 20 150 3,000Balance of stock control ledger account 11,550
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.
Reasons for stock losses Undersupply by suppliers Oversupply to customers Theft Recording errors in the stock cards Double invoicing by supplier Stocktaking errors
Reasons for stock gains Oversupply by suppliers Undersupply to customers Recording errors in the stock cards. Stocktaking errors.
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 accountJun 30 Balance 40,000 Jun 30 Stock loss 1,500 Stock loss accountJun 30 Stock control 1,500
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 accountMay 31 Balance 25,000May 31 Stock gain 84 Stock gain account May 31 Stock control 84