Perpetual Inventory Journal Entries

[Jobird]

Hi there, 

We have recently changed from Periodic Inventory to Perpetual Inventory. It all seems to be working well as far as tracking inventory items, however, I can't get the accounts correct anymore. In each Item in Inventory, we have:

"I Buy" - allocated to a COGS account for a group of items (eg. 5-1100 - Purchases - Item X)

"I Sell" - allocated to a Sales account for the same group of items (eg. 4-1100 - Sales - Item X)

"I Inventory" - allocated to the Balance Sheet Inventory account.

With the Periodic Inventory system, we'd do monthly stocktakes and adjust the values using Closing Stock in the P&L (eg. 5-5000) and the Balance Sheet Inventory account, which would be equal.

With the Perpetual system, each time there is a sale, the sale is recorded against 4-1100 - Sales - Item X, and it does another entry:

Debit    Purchases - Item X (cost)

Credit   Inventory - Balance Sheet (cost)

So the Inventory in the Balance Sheet reflects the actual inventory value, but the Closing Stock account isn't being adjusted at all. I now have a difference between Closing Stock in the P&L (5-5000) and the Balance Sheet Inventory account equal to the cost of any product sold and/or purchased. 

If I had "I Buy" for each item allocated to Closing Stock (5-5000) rather than for a specific group of items (5-1100 - Purchases - Item X) it might work, but then we wouldn't have the COGS Purchases split we're after...

Any ideas?
    

[Steven_M · Accepted solution]

Hi @Jobird 

When you have an item that is set to be I Inventory this Item, you do get the option to select a series of accounts:

• An Asset account for Item Inventory,
• Income Account for Tracking Sales,
• Cost of Sales Account. 

Basically, in short, when you record a purchase it will add the inventory into the stock i.e. the Inventory asset account. When you record an invoice, the system will record the amount of the sale to the income account. It will also reduce the asset account as the item is coming out of stock and increasing the cost of sales amount as the item has been sold. 

As such, if you are looking at what the value of your closing stock you would typically be looking at the Inventory account amount. As this is would be impacted by each transaction you record for those items i.e. increase when stock is purchased, decreased when stock is sold. Using the cost of sales account may not give you an accurate value as it will not factor into items that you purchased but not sold (as is there is no sales there is no costs of sales).