There are two inventory systems available: perpetual and periodic.
The perpetual inventory system is used by most merchandisers; it records every purchase and sale of inventory by the merchandiser directly into the merchandise inventory account. (This is a computerized system.) In this way, the merchandise inventory account should at all times be equal to the goods that are still on the store's shelves. In reality, theft, breakage, and errors create what accountants refer to as inventory shrinkage. As a result, there are discrepancies in the system. GAAP requires that every company must complete a physical count of inventory on hand at the end of the company's fiscal year to determine the amount of inventory shrinkage. This course will use the perpetual inventory system when recording transactions.
The periodic inventory system accounts for the store's purchases as they occur, but the cost of goods sold is not recorded in the accounting records at the time of sale. Instead, at the end of an accounting period, a physical count must be made of the merchandise still on hand. The merchandise inventory account is then adjusted so that the ending balance equals the physical count. This system was used in previous lessons when recording supplies expense. Many small businesses that cannot afford the expense of the perpetual system still use the periodic method of determining inventory.
