10 Inventory

A perpetual inventory system shows the current value of inventory in stock – the inventory account is always up to date. This is great for a company because their accounting system always has up to date inventory information. If inventory is important to a company’s business model, a perpetual inventory system will benefit the company by helping them make decisions based on the most recent information. Think about the Indigo bookstore. You can enter a book title into the system and get information on how many copies are in any store in the province. Helpful to have up-to-date information, right? However, a perpetual inventory system does require computer systems that can track physical inventory and keep record of inventory cost. For companies such as Indigo that require this information as part of their business model, a perpetual inventory system can benefit the company and their customers.

The good news is that you have been using the perpetual inventory system without knowing it. All of the journal entries you recorded for inventory sales and purchases up to this point have used the perpetual inventory system. As a reminder, remember that inventory increases with a debit and decreases with a credit. So when purchasing inventory, you will debit Inventory and credit Accounts Payable. When selling inventory, you will debit Cost of Goods Sold and credit Inventory.

Let’s do a couple examples just as a refresher. You’ll notice one new entry in these examples. At the end of every month or year, a company will count its inventory. How often an inventory count happens will depend on the importance of inventory to a company’s business model. The number of inventory units counted will not equal inventory recorded in the bookkeeping records. Why? Great question. Inventory might get damaged, stolen, or given away for promotions without being recorded. So our inventory count will likely be lower than the inventory recorded in our accounting system. A company wants its accounting system to show how much inventory they actually have, so the accounting system will have to be adjusted to equal the count. Ok, let’s get going. I will do the first problem and you do the second.

Hockey Haven (My Turn)

Hockey Haven (HH) is a hockey stick retailer. At the beginning of September, HH had an inventory of 10 sticks (cost of $200). During the month of September, HH engaged in the following transactions:

September 4: HH sold 10 hockey sticks for $50 each (cost of each stick is $20)

September 8: HH purchased 30 hockey sticks for $25 each (on account)

September 15: Hockey season has started and HH sold 22 sticks for $64 each ($25 cost per stick)

September 19: HH purchased 24 hockey sticks for $27 each (on account)

September 24: HH sold 8 hockey sticks for $70 each (cost of each stick is $25)

September 28: HH sold 16 hockey sticks for $67 each (cost of each stick is $27)

HH performed an inventory count at the end of the month counting 6 sticks at a cost of $162 while the trial balance showed HH to have 8 sticks at a cost of $216.

Record Hockey Haven’s September transactions using a perpetual inventory system.

Sept 4 : HH sold 10 hockey sticks for $50 each (cost of each stick is $20)

Sept 8: HH purchased 30 hockey sticks for $25 each (on account)

Sept 15: Hockey season has started and HH sold 22 sticks for $64 each ($25 cost per stick)

Sept 19: HH purchased 24 hockey sticks for $27 each (on account)

Sept 24: HH sold 8 hockey sticks for $70 each (cost of each stick is $25)

Sept 28: HH sold 16 hockey sticks for $67 each (cost of each stick is $27)

Sept 30: HH performed an inventory count at the end of the month counting 6 sticks at a cost of $162 while the trial balance showed HH to have 8 sticks at a cost of $216.

Now it’s your turn to practice inventory journal entries. You’ve got this!

Well done!! Now let’s take a look at journal entries using the periodic inventory system.