Perpetual Inventory System Journal Entries

Firstly, we must know about what is perpetual Inventory system?

It is a system in which all Business Transactions related to value of inventory are updated on daily and regularly basis at once when these occur in working business time. All Purchases of Merchandise, sales, closing Inventory are regularly updated.

Following Inventory Journal Entries are passed under Perpetual Inventory System:

Purchase of Clothes

When an Entrepreneur doing retail business of cloths purchases 10 pieces of Clothes on credit from his / her supplier or Accounts Payable for Rs.1000, then he / she records the following Journal Entry in his / her Inventory Journal:

Inventory a/c  10000

                    Accounts Payable a/c 10000

(10 Pieces of Clothes Purchased at the rate of Rs.1000 from Accounts Payable)

Sales of Clothes

Suppose, three cloths are sold on credit at the rate of Rs.2000 to his / her Customers or Accounts Receivable, then following sales Journal Entry is made in ledger:

Accounts Receivable a/c   6000

                                   Sales a/c 6000

3 Pieces of Clothes Sold at the Rate of Rs.2000 to Accounts Receivable (Customers)

Cost of Goods Sold Journal Entry Under Perpetual Inventory System

Now, according to Matching Concept which is one of the Principles of Generally Accepted Accounting Principles (GAAP), that all the revenues must be matched with all those expenses incurred in earning that revenue, so we record the following Journal Entry in case of cost of sales of cloths:

Cost of Sales a/c  3000

                    Inventory a/c 3000

3 Pieces of Clothes Sold recorded at the cost price that was originally purchases at the rate of Rs.1000

Payments made to Accounts Payable or Suppliers for the purchased cloths

Accounts Payable a/c  10000

                             Cash a/c  10000

Payment of Cash Rs.10000 to Accounts Payable for the cloths purchased at the rate of Rs.1000

Cash Received From Customers for the Cloths sold on Credit

Cash a/c  6000

          Accounts Receivable a/c  6000

(Cash of Rs.6000 Received from customers for the cloths sold at the rate of Rs.2000)

So, in Perpetual Inventory System, we record the updated value price of Inventory immediately.