Question

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?

Answer 1

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