Explain perpetual and periodic inventory methods of recording merchandise inventory

Solution to the above question and problem is provided in the M.S.Word file attached herewith in the following parts.
1 Detailed explanation of perpetual inventory and periodic inventory methods.
2 Full working for cost of goods sold and General ledger inventory account for verification of ending inventory.
3 Comparative general journal entries of two systems in columnar form with each transaction details.

Perpetual inventory Method:
In perpetual method the business keeps continuous record of each inventory item. The inventory is recorded as and when it is purchased and issued for consumption or sold to customers. Computerized perpetual system can provide up to the minute inventory data regarding Receipts, issues and balance of each item of inventory. In perpetual inventory system purchases and sales are recorded directly to inventory account. Following are the important features of this system.

1 Purchases are directly debited to inventory account. Purchase account is not involved in this accounting system.

2 Cost of Goods sold is debited and inventory is credited for each unit consumed or sold. Inventory is debited and cost of goods sold is credited for the goods returned by the buyers.

3 Purchase discount allowed by the supplier for the prompt payment as per the terms is credited to inventory account and not the purchase discount account.

4 Any difference in inventory balance by physical count and book value is recorded as inventory over and short.

Periodic Inventory Method:
In periodic system the business does not keep a continuous record of the inventory on hand. Physical count of inventory is made at the end of the accounting fiscal period and cost of ending inventory is calculated by applying appropriate unit cost. The inventory record is updated periodically.

Following are the important features of this system.

1 Purchases are directly debited to Purchases account. Inventory account is not operated in this accounting system.
2 Inventory returned to supplier is debited to Account payable and credited to purchase return account and not to Inventory account.
3 Discount allowed by supplier is credited to Purchase discount and not inventory account.
4 Cost of Goods sold is calculated at the time of income statement preparation and special entry is not passed from time to time when inventory is issued for consumption or sold to customers.
5 Physical counts is made at the end of the period, normally at the end of fiscal period and ending balance is based on it.
6 journal entry is made to remove the beginning balance of inventory.

Problem:

Jan 1, 2005 Inventory on hand 1-1-2005 $ 50000
Jan 5 Purchase of inventory for cash 100000
Jan 5 Purchase of inventory on account-terms 2/10,n/30 215000
Jan 5 Cost of transportation & freight 5000
Jan 10 Inventory returned to supplier 15000
Jan 15 Paid supplier in full after deducting 2% discount 196000
Jan 15 Sale of inventory on account-Cost 270,000-terms 2/10,n/30 324000
Jan 20 Inventory returned by buyer-cost 20000 24000
Jen 25 Received cash from account receivable less 2% discount 294000
Jan 31 Physical count showed inventory on hand-cost 101000

Working for Cost of goods sold
Inventory on hand 1-1-2005 $ 50000
Purchase of inventory for cash 100000
Purchase of inventory on account 215000
Cost of transportation & freight 5000
Total cost of inventory available for sale 320000
Less: Purchase discount -4000
Less: Purchase return -15000
Cost of inventory purchased 301000
Cost of inventory available for sale 351000
Less: Ending Inventory 101000
Cost of Inventory sold 250000

General Journal Entries in Perpetual and periodical inventory methods.:

Transactions Perpetual system Periodic system
1 Purchase Inventory $315000
Cash 100000
Account payable 215000 Purchase $300000
Cash 100000
Account payable 200000
2 Transportation cost or freight in Inventory 5000
Cash 5000 Freight in 5000
Cash 5000
3 Inventory returned to supplier Account payable 1500
Inventory 1500 Account payable 1500
Purchase return 1500
4 Payment to supplier Account payable 200000
Cash 196000
Inventory 4000 Account payable 200000
Cash 196000
Purchase Discount 4000
5 Sale of inventory Account Receivable 324000
Inventory 324000 Account Receivable 350000
Sales 350000
6 Recording cost of goods sold Cost of Goods sold 270000
Inventory 270000 No entry
7 Sales Return Inventory 24000
Account Receivable 24000 Sales return
& Allowance 20000
Account/Receivable 20000
8 Amount collected from A/R less 2% discount Cash 294000
Sales Discount 6000
Account Receivable 300000 Cash 294000
Sales Discount 6000
Account Receivable 300000
9 Recording Cost of goods returned Inventory 20000
Cost of goods sold 20000 No Entry
10 End of period
adjustments No entry both inventory and
Cost of Goods sold are up to date. Cost of Goods sold 250000
Inventory(Ending) 101000
Purchase discount 4000
Purchase return 15000
Purchases 315000
Freight in 5000
Inventory (Beginning) 50000

General Ledger-Inventory Account (Perpetual inventory system)

Jan 1, 2005 Inventory on hand $ 50000 Jan 10 Purchase Return 15000
Jan 5 Purchase of inventory for cash 100000 Jan 15 Purchase discount 4000
Jan 5 Purchase of inventory on account- 215000 Jan 15 Inventory sold 270000
Jan 5 Cost of transportation & freight 5000 Jan 31 Ending Inventory (Balance) 101000
Jan 20 Sales Return 20000
Jan 10 Total 390000 Total 390000.