 Hello and welcome to the session in which you would look at the perpetual inventory system and a periodic inventory system and a series of transaction illustrating the difference between those two inventory system. And at the end of the recording, we would look at how to compute cost of goods sold under both system. This topic is covered in intermediate accounting and it's covered on the CPA exam very heavily. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. Most likely you are taking a course. I am a useful addition. You can add me to your CPA review course. I explain the material differently than your CPA review course. I go a little bit more in depth than your CPA review course. I go over the material slower than your CPA review course. If you can understand the material better, it will help you with your CPA review course and you will add 10 to 15 points to your CPA exam score. Your risk is one month of subscription. You can give me a try. See if you like it. It's working. You keep it. If it's not, you cancel. Your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university is doing on the CPA exam. I do have resources, multiple choice through false lectures for other courses such as advanced accounting, managerial accounting, governmental accounting, taxation, so on and so forth. My supplemental CPA review courses are aligned with your becker, Wiley, Roger, Gleam. So it's very easy to go back and forth between my resources and your CPA review course. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording. Share it with other. Connect with me on Instagram, Facebook, Twitter and Reddit. The best way to illustrate the concept of perpetual and periodic inventory system is to actually look at an actual example. So we're going to go through a series of journal entries. Starting with what's giving, beginning inventory was 110. This is what we have to start with. There's no entry. The inventory already existed when we opened the store at the beginning of the month or at the beginning of the period. Then we purchased on account $600,000 with the terms three slash 10 and 30. Simply put, we made a purchase. We purchased more merchandise. We're in the business of soft drinks. Well, now we need to record this. We're going to debit under the perpetual inventory system. We will debit inventory under the periodic inventory system. We debit purchases. So hopefully you'd remember that under inventory, perpetual is continuously updating your inventory. Therefore, you debit inventory automatically. Then we credit accounts payable because we purchased them on account and they're giving us 10 days to pay and we get 3% if we do pay within 10 days. ABC Adam beverage company paid 15,000 for freight charges for freight charges. Well, what's going to happen is under the perpetual inventory system freight charges freight in is part of your inventory. Therefore, we're going to debit inventory for 15,000. We paid cash. We're going to credit cash for 15,000 under the periodic inventory system. Actually, we're going to keep track of freight separately. Therefore, we debit freight 15,000. We credit cash 15,000. Now eventually the freight will be part of the whole picture part of the inventory and part of cost of goods sold. But for now, we keep track of it separately. Merchandise with the cost of 10,000 will return to the suppliers for credit. We had a purchase return. Well, the purchase return is the opposite of a purchase. When we purchase, we debit inventory credit accounts payable. When we do a purchase return, we reverse this. We credited inventory and we debit accounts payable. We debit accounts payable. We reduce accounts payable and we reduce our inventory. That's the return. Because we return the merchandise from a periodic. We don't have inventory. Remember, it's also the opposite of a purchase. Therefore, we debit accounts payable credit purchase return. So notice here we have another account under the periodic purchase return. We have an account called freight and we have an account called purchases and all these accounts under the perpetual inventory system. They're all, they all go under inventory because inventory is being updated constantly. All purchases on account were paid within the discount period. Now we started, we purchase $600,000. Then we returned $10,000. What's left is $590,000. Well, we're going to pay within the discount period. Therefore, we're going to get 3% off. So we're going to multiply this by 0.97. So if we multiply it by 0.97, it means we're going to pay 97% 97% of the bill, or we can say 590 times 3% will give us 17,700, which is the discount. So under the perpetual inventory system, we are going to credit cash $572,300, which is again, we're paying 97% of the bill. We're going to debit accounts payable for the full amount, which is $590,000. Accounts payable was $600,000, but we did return $10,000 of it. Under the periodic inventory system, the cash is the same. We have to pay $572,300. For the $17,700 for the discount, we're going to have an account called a purchase discount. Again, more accounts. So notice the different accounts that we have for the periodic. So I'm going to highlight them. Purchase discount, purchase return, freight in, purchases. Notice versus inventory, inventory, inventory, inventory. Okay. So under the perpetual, the inventory is being updated constantly. Sales totaled $800,000 and the cost of sales was $532,300. So we debited, what we do is we debit account receivable, credit sales revenue, debit cost of goods sold credit inventory. Under the periodic inventory system, we only record the sale. We have no cost of goods sold. We don't record cost of goods sold. Now, where did the cost of goods sold came from here? Well, we're going to see when we do 50 life or we keep track of the perpetual inventory system continuously. This is what we'll do next and the next session, but for now it's giving to us. At the end of the period, the company will have to counter inventory and they said remaining on hand was 170, inventory remaining on hand. Now, for the perpetual inventory system, they don't have to do anything. Why not? Because this number 170 was already being tracked in cost of goods sold was already being tracked as we make purchases and sale. Because remember inventory was constantly being tracked. And if you want to, you can take beginning inventory, then add 15, reduce it by 10, reduce it by 17,700. And you're going to get to 530, I'm sorry, you're going to get to 170. Okay, so it's being tracked. I'm sorry, ending inventory, yes, it's being tracked 170. Cost of goods sold, cost of goods sold was also being tracked. And again, for now, we're going to ignore it. So how do we compute cost of goods sold for the periodic inventory system? Well, cost of goods sold, what did we learn about cost of goods sold? We said, let me show you first show you the formula. We said beginning inventory, which we started with 110 beginning inventory was giving to us plus purchases plus freight in this is part of the cost of the inventory minus return minus $10 minus the discount 17,700 because we got a discount pain early. Our cost of inventory or I'm sorry, all goods available for sale were 702,300. Then we deduct ending inventory, and we're going to come up to 532,300, which is the same as 532,300. Now let me show you in a journal entry, how do we do this? First, we're going to have to do what we're going to have to remove beginning inventory because remember beginning inventory was giving to us that beginning inventory has to be gone. Therefore we credit beginning inventory. We credit purchases. Purchases is a temporary account. We credit freight in because freight in is also a temporary account will have to be closed. All these will have to be close to cost of goods sold. Then we debit inventory 170,000 because we counted the inventory and this is how much inventory we have. So basically we're getting root of the beginning to establish the ending. Then we have to get rid of purchase return, which is we debit purchase return. We have to get rid of purchase discount. We debit purchase discount. And what happened here? If you net all these out, what's missing is a cost of goods sold of 532,300. So simply put cost of goods sold, it's a plug. But again, I showed you the computation here beginning inventory 110 plus purchases plus freight minus return minus discount minus ending will give us the plug of 532,300. It's very important that you understand this formula and it's also important to understand the journal entry. In the next session, we'll focus on FIFO, LIFO, weighted average and specific method shows show you how we keep track of inventory, keeping track of the inventory cost flow. At the end of this recording, I'm going to remind you again whether you are an accounting student or a CPA candidate to take a look at my website farhatlectures.com. I don't replace your CPA review course. I am a useful addition. Give me a chance. It's only one month. Try it. You like it. You keep it. You don't. That's your maximum loss. You are investing in your future. It's worth to throw everything on the CPA exam. It's worth to invest in your education. Good luck. Study hard. The CPA exam is worth it and stay safe.