LO1.
Prepare chart of accounts
LO2. Analyze documents
LO3. Prepare journal entry
The preceding definition covers four distinct functions, namely,
Recording - the process of putting into writing the financial activities of the
enterprise chronologically. The term "chronologically" would mean that
financial activities are recorded in the order of their actual happening. This
is technically referred to as BOOKKEEPING. Bookkeeping is defined as
the systematic and chronological recording of business transactions and
events.
Classifying - the process of grouping into specific classifications similar or
alike transactions.
Classifying - the process of grouping into specific classifications similar or
alike transactions.
3. Summarizing - the process of preparing financial reports (interchangeably
used to means "financial statements") from the recorded and classified
transactions and events of the enterprise.
4. Interpreting - the process that supplies answers to questions about the
profitability, stability, solvency and liquidity of an enterprise.
Profitability - the ability of the enterprise to generate profit from its operations.
Stability - refers to the ability of the enterprise to stay viable, i.e.; generate
profit for the owners, sustain operations and pay for long term financial
obligations.
Solvency - should mean that the enterprise is capable of paying its short term
obligations.
Liquidity - refers to the enterprise having sufficient cash.
What is inventory?
Inventory: the goods that are trading firm buy and sells.
A trading firm buys its inventory and sells it at higher
price in order to earn revenue.
Exclude from inventory: non-current assets.
- ADVANTAGES OF PERPETUAL INVENTORY SYSTEM
As merchandise stock is restricted to a certain limit the
additional investment of capital is not required.
This is a complete and dependable verifying method over the
store.
Closure of normal business activities is not required during the
physical counting of merchandise inventory
What is Perpetual Inventory?
- Describe system of inventory where information on inventory
where information on inventory quantity and availability is
updated on a continuous basis as a function of doing business.
- PERPETUAL VS. PERIODIC INVENTORY SYSTEMS
- The primary issue that companies face under such periodic
inventory system is the fact that there is a lapse in updated
inventory information and accounting for COGS between
inventories.
DISADVANTAGES OF PERPETUAL INVENTORY SYSTEM
KEEPING ACCOUNTS OF STOCK UNDER THE PERPETUAL SYSTEM IN THE
ORGANIZATION DEALING WITH THE VERITIES OF GOODS IS EXPENSIVE
AND TIME-CONSUMING.
BUT NOWADAYS USING COMPUTER AND ELECTRONICS SCANNER
ALMOST ALL BUSINESS ORGANIZATIONS FOLLOW THIS METHOD.
FUNCTIONS OF PERPETUAL INVENTORY SYSTEM
RECORDING STORE RECEIPTS AND ISSUES TO DETERMINE THE STOCK
IN HAND AT ANY TIME, IN QUANTITY OR VALUE OR BOTH, WITHOUT THE
NEED FOR PHYSICAL COUNTING OF THE STOCK.
CONTINOUS VERIFICATION OF THE PHYSICAL STOCK WITH REFERENCE
TO THE BALANCE RECORDED IN THE STORE RECORD IS CONVENIENT
FOR THE MANAGEMENT.
DIFFERENCE BETWEEN PERIODIC AND PERPETUAL
INVENTORY
A. Periodic – During the period, the inventory account is not
change thus, it reflects the beginning inventory amount.
During the period, each purchased is recorded in the
purchased account
B. Perpetual – During the period, the inventory account is
increased for each purchased and decreased (at cost) for
each sale at the end.
COST OF GOOD SOLD
PERIODIC – During the period, no entry is made for cost of
good sold. The end of the period, after the physical inventory
count, cost of goods sold is measured as; Beginning
inventory + Purchases- Ending inventory = cost of good sold.
Perpetual inventory – During the period, cost of good
sold is recorded at the time of each sale and the
inventory account is reduced (at cost). Thus the system
measure the cost of good sold amount for the system.
EXAMPLE OF PERIODIC INVENTORY SYSTEM
PW AUDIO SUPPLY, INC.
COST OF GOOD SOLD
For the Year Ended December 31, 2022
Cost of good sold
Inventory, January 1 P36,000
Purchases P325,000
Less: Purchase return and allowances P10,400
Purchases discounts 6,800 17,200
Net purchases 307,800
Add: Freight-in 12,200
Cost of goods purchased 320,000
Cost of goods available for sale 356,000
Inventory, December 31 40,000
Cost of good sold P316,000
