Cbu's New Accounting System Periodic

CBU's New Accounting System Periodic Inventory System Instituted at CBU There are Periodic and Perpetual systems of inventory. Under the Perpetual system the inventory is constantly updated when the merchandise is purchased, and is also double-entried by recording the cost of the merchandise in the "Cost of Goods Sold" account, debited at the time of each sale. The Perpetual Inventory System asks that the merchandise be continuously recorded in one or more Purchases Accounts each time a purchase is made.

CBU may have had this system in the past, but it has instituted a new system, the Periodic System. (Accounting) Under the Periodic system, which CBU obviously has begun to use with their new computer system, the Inventory account is not updated when purchases are made, but is adjusted at the end of the year. However, the Inventory Account is not reduced by that amount. Only at the end of the year, when the Purchases Accounts are closed is the Inventory account adjusted to equal the cost of the merchandise.

This Periodic system allows for no "Cost of Good Sold" account to be updated when a sale of merchandise occurs. The problem with Periodic Accounts is that there is no way to tell from the general ledger accounts how much inventory there is during the year, or how much inventory has been sold. On January 1, CBU installed a new computer system for tracking and calculating inventory costs. Accountant A was proud of having a good system of internal control.

CBU had followed good internal control procedures by having a regular physical inventory count to safeguard a valuable enterprise resource." (The system was obviously a Periodic Inventory system, but a physical check was done periodically, in order to add control numbers.) Double-entry accounting is the basic standard system to record variables, so that a record was kept in two areas of any changes in inventory. If the item was purchased (debit inventory) then it must also be paid for (credit bank account).

Balances are kept during periodic counts, but on the Inventory account adjustments would not be made at that time. Waiting until December 31 to adjust entries is standard for the Periodic Inventory system, which CBU uses. It is all right to have an Adjusting Entry, to reflect actual numbers, however, as Accountant A mentioned, to safeguard the resources. Accountant B. felt differently. She was concerned about the bad decisions that were made throughout the year based on the incorrect inventory numbers.

She felt that she and the other accountants should have helped develop more timely and effective system controls." Accountant B. was right to be concerned. However, the balance sheets that were created during the year would eventually be checked, and the inventory balances would be noted.

It would also be noted that inventory balances had been adjusted to reflect all downward adjustments at the end of the year The related income statement account would then have the periodic adjusting entry, which for CBU, when compiled at the end of the year, should equal the amount of $1 million. Losses in supplies, but usually not inventory, need to be entered into the asset account in order to reduce the periodic balances.

If part of January's inventory had been lost, that would have been recorded in January under the old (Perpetual) system. But under the Periodic System, it would not have been necessary to record any loss of inventory at that time.

However, simply recording the loss, as Accountant A had done, in order to safeguard the "valuable enterprise resource," for CBU was sufficient, and an adjusting entry for all losses during the year, at the end of the year when inventory is reported as a current asset on the balance sheet, is standard.