The perpetual inventory system journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting under a perpetual inventory system.
What is the Perpetual Inventory Method?
The perpetual inventory method is a method of accounting for inventory that records the movement of inventory on a continuous [as opposed to periodic] basis. It has become more popular with the increasing use of computers and perpetual inventory management software.
Although the perpetual inventory system can be more expensive and time consuming to maintain, it has the advantage that the accounting records always reflect the levels of inventory on hand at any point in time, allowing real time management of inventory.
Under the perpetual inventory method each time there is a movement journals are processed to record the change. Purchases are debited to inventory and sales are credited to inventory, with the debit going to the cost of goods sold account.
At the end of an accounting period, the balance on the perpetual inventory account should be the same as the physical inventory available. Differences will arise due to accounting errors, theft, shrinkage etc. An inventory count is normally carried out at least once a year to allow for discrepancies to be investigated and corrected,
In each case the perpetual inventory system journal shows the debit and credit account together with a brief narrative. For a fuller explanation of journal entries, view our examples section.
To purchase goods from a supplier using perpetual inventory system journal entries
| Inventory | XXX | |
| Accounts payable | XXX |
To record a supplier purchase discount
| Inventory | XXX | |
| Accounts payable | XXX |
To record freight costs
| Inventory | XXX | |
| Accounts payable | XXX |
To record a purchase return to a supplier using perpetual inventory system journal entry
| Accounts payable | XXX | |
| Inventory | XXX |
To record the sale of goods to a customer using perpetual inventory system journal entry
| Cost of goods sold | XXX | |
| Inventory | XXX | |
| Sales | XXX | |
| Accounts receivable | XXX |
To record a sales return from a customer using perpetual inventory system journal entry
| Inventory | XXX | |
| Cost of goods sold | XXX | |
| Sales returns | XXX | |
| Accounts receivable | XXX |
To record a physical inventory count shortage
| Loss on inventory write down | XXX | |
| Inventory | XXX |
To record inventory received not invoiced by supplier
| Inventory | XXX | |
| Inventory received not invoiced | XXX |
*It should be noted that for a perpetual inventory system, there is no end of period bookkeeping entry.
Perpetual vs Periodic Inventory System Journal Entries
This reference guide is for perpetual inventory system, if the business is using a periodic inventory system the journal entries are different and can be seen in our periodic inventory system journal entries reference guide.
The perpetual vs periodic inventory system journal entries diagram used in this tutorial is available for download in PDF format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
July 16, 2019