![]() The count at the end of February is also used as the value for the start of March. We talk about the value of stock at the start of the month and at the end of the month, but we only count once a month. The idea is to say that the amount of inventory we used in the month is the amount we bought in the month, taking away anything we bought but didn't sell yet. So the cost of goods sold over the whole month is $0 (starting) + $1000 (purchases) less $800 (at the end of the month) = $200. When you count your stock at the end of the month, you have 8 coats, which you give a value of $800 (you sell them for $250 each, but we always value stock at our replacement cost). At the end of March, you have sold two coats. You bought $1000 of winter coats, (10 coats which cost you $100 each). Say in March you started with $0 of stock. ![]() the dollar value of your stock precisely at the end of the month.the dollar value of your purchases over the month (which is easy, since you record them anyway to pay them).So in the Periodic Inventory system, you need to know "Value of stock" in this case means dollars, not quantity. If you need to have daily insights into your business, you should give the periodic system a big black mark already. The period for most businesses is usually a month. Periodic works out what stock you consumed in a certain period that's where the name comes from. It works differently, but comes to the same conclusion as Perpetual, at least as a total. If you bought $1000 of stock and sold none of it, the net effect of stock purchases would be zero. In order to prevent unsold inventory from lowering your profit, stock purchases is reduced by the change in stock. In the periodic inventory system, you record the cost of stock when you buy it, in an expense account called "Purchases" (this account does not exist for stock in the Perpetual system). See also: Choosing a cloud-based accounting system in Australia Periodic Inventory Explained In the Periodic Inventory System, we record this level of detail. With sales of $500, your contribution margin on the sale is $300. If on an invoice you sold two coats at a retail price of $250 each, and they cost you $100 to buy from your supplier, you cost of goods sold is $200. But it is normal to do this for supplies like printer paper. You probably would not want to do this for trading stock, because you lose insight into your margin. You can still buy things and treat them as an immediate expense. Note that you don't have to use a "cost of goods sold" method for everything in your business. That is, it needs to make reports called "Balance Sheet" and "Profit and Loss" (also known as "Income Statement"), and it has to have an "inventory" account. Your system needs to be a real double-entry bookkeeping system.The system needs to know the replacement cost of each item.And your sales orders must detail exactly which items you shipped. You need to record changes: so when you receive stock, you need to tell your system.Your system needs to record the quantity you have of each item. ![]() To use perpetual inventory, you need these capabilities: This is the way "accrual accounting" works. This approach matches the timing of your expenses (having to buy more stock) with the shipment. This means that if you buy a lot of stock in a month but don't sell much, your profit won't be affected by your investment in stock. An "asset" is something you own which will benefit you in the future. Since inventory doesn't become an expense until you sell it, we keep unsold inventory in an asset account called "inventory". The true economic cost is the actual replacement cost, but it is impractical to assess this in most cases, so we use approximations of the replacement cost, such as the actual cost we paid for the item we are selling, or the average cost we paid for all of our stock of that item. What cost? You incur the cost of replacing the stock, the instant you ship. Under the Perpetual Inventory system, you record each movement of stock. The only benefit of the Periodic method is less record keeping, a significant advantage before cheap computers. Between counts, you don't have a record of stock, so under the periodic inventory system, you don't record what you sold to whom. The alternative, the Periodic Inventory System, relies on periodic (usually monthly) inventory counts. "Constantly Correct Inventory" system may be better. The Perpetual Inventory System is 'perpetual' because it always (perpetually) tracks movements of stock the instant they happen. You'll make better pricing, discounting and marketing decisions. The Perpetual Inventory System is superior to the Periodic Inventory System: it provides gross margin of each invoice line and margins for each customer.
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