In: Accounting
1. Describe the difference between a periodic and a perpetual inventory system
2. What are closing entries and why do we do them?
3. What is the adjusting process and why is used?
1)
Nature | Periodical Inventory System | Perpectual Inventory System |
Meaning | system of inventory accounting in which position of stock in hand and cost of goods sold is determined by physical counting | system of inventory accounting in which real time tracking of inventory movements is done |
Accounts Updation | Inventory accounts do not reflect accurate picture at all times. The correct inventory position is only updated in accounts at the time of physical counting | Inventory accounts are updated on a real time basis |
Determination of Cost of Goods Sold | At the end of specific period on application of mathematical formula | Can be determined at any time from inventory system |
Preferrable | For smaller enterprises | For larger enterprises |
Effects on Business Functioning | Continuity of business operations effected at the time of physical counting | Continuity of business operations not effected |
Requirement | Can be maintained manually | Requires computer systems |