True Or False | Under Perpetual Inventory System, A Company’s Unadjusted Balance In Inventory Usually Does Not Agree With The Actual Amount Of Inventory On Hand At Year-End.

The statement is “True”, as under Perpetual Inventory System (PIS), Inventory Account (IA) is constantly updated on every sales made, purchases made or the occurrence of sales returns & allowances, sales discounts, purchases returns & allowances and purchases discounts but the physical count of Inventory (I) is not made. So, errors or mistakes in recording I, theft and wastage of merchandise or goods on hand are not taken into account unlike periodic inventory system, So, the balance of I on hand is different with the actual balance of I on hand. That is why, under PIS, the inventory control management makes physical count of merchandise on hand at the end of period.

Due to the difference between merchandise on hand and actual balance of merchandise on hand by taking the physical count, there is a need to make adjustment for such unadjusted balance in IA. The adjustment affects inventory and cost of goods sold. If the unadjusted amount in I is greater than the actual amount of I on hand, then there is a loss otherwise, there is a gain. The entries to record, in case of loss and gain are shown below:

(a) Shortage (Loss / Expense)

 Inventory Over And Short a/c  XXX

                                               Inventory a/c XXX

 (IOAS a/c Recorded As An Expense)

 (b) Overage (Gain / Revenue)

I a/c XXX

                IOAS a/c  XXX

(IOAS a/c Recorded As Gain / Revenue)

The company adjusts IOAS in cost of goods sold or sometimes reports under “Other Expenses Or Losses” or “Other Revenues Or Gains” section of the income statement for the current accounting period.

Under periodic inventory system, there is no need to make adjustment as Ending Inventory (EI) is recorded by taking the physical count and cost of goods sold is the remaining amount after deducting EI (by physical count) from cost of goods available for sale.