Types of Inventory

Periodic Inventory

1. Inventory entries made only at the end of the period.
2. Must calculate Cost of Goods Sold (COGS)
   1. On the Balance Sheet, show ending inventory
   2. On the Income Statement, show calculation of COGS
3. Detailed inventory accounts are not kept up-to-date (This can delay identifying shrinkage problem).
4. Journal Entries
   1. To record purchase: DEBIT-Purchases: CREDIT-A/P#
   2. To record sales: DEBIT-A/R & CREDIT-sales revenue
   3. To Close the books, end of period
      • DEBIT – Income Summary for Beg. Inv.bal & CREDIT – Inv. (Beg. Bal)
      • DEBIT – Inv. (Ending Bal.) & CREDIT – Income Summary (Ending Bal)

Perpetual Inventory

1. Continuous record of inventory on hand is maintained.
2. Inventory on hand is computed daily.
3. Physical count only to check on perpetual records.
4. On the Balance Sheet, show Inventory.
5. On the Income Statement, Sales Revenue – COGS = Gross Margin.
6. Journal Entries
   1. to record purchase: DEBIT-Inventory; CREDIT-A/P
   2. to record sales: DEBIT-A/R & CREDIT-Sales Revenue & DEBIT-COGS; CREDIT - Inventory

View an example of how to account for inventory in the operating cycle of a merchandise business.

Planning for your own inventory? Download a sample Cost of Goods Sold Analysis form here.