Actual Unit Cost Method

It may be appropriate to record inventory of very high value at their actual unit costs. This method is only practical where the number of inventory items is very small and distinguishable such as in the property business.

Accounting for Inventory

Opening inventory is brought forward from the previous period's ledger account and charged to the income statement as follows:

Debit	Income Statement
Credit	Inventory

Closing inventory at the period end is recorded as follows:

Debit	Inventory
Credit	Income Statement

The Inventory Ledger Account therefore would appear as follows:

Inventory Account
Debit	$	Credit	$
Balance b/f	100	Income Statement	100
Income Statement	200	Balance c/d	200
	300		300

The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:

Opening Inventory	100
Add: Purchases	500
Less: Closing Inventory	(200)
Cost of Goods Sold	400

Note that the cost of goods sold is not simply the cost of purchases during the period. This is the application of the Matching Concept which requires expenses to be recognized against periods from which associated revenue from the expense is expected to be earned. Therefore, as closing inventory is not consumed at any given accounting period end, it must not be part of expense which is why it is deducted from the cost of sale. Similarly, as opening inventory is consumed in the current accounting period, it must therefore be added to the cost of goods sold.

3) Perpetual vs Periodic Inventory System

Perpetual inventory system and periodic inventory systems are the two systems of keeping records of inventory.

In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. Some other transactions may also require an update to inventory account for example, sale/purchase return, purchase discounts etc. Purchases are directly debited to inventory account whereas for each sale two journal entries are made: one to record sale value of inventory and other to record cost of goods sold. Purchases account is not used in perpetual inventory system.

In periodic inventory system, merchandise inventory and cost of goods sold are not updated continuously. Instead purchases are recorded in Purchases account and each sale transaction is recorded via a single journal entry. Thus cost of goods sold account does not exist during the accounting period. It is determined at the end of accounting period via a closing entry.

Differences Between Perpetual and Periodic System

Following are the main differences between perpetual and periodic inventory systems:

• Inventory Account and Cost of Goods Sold Account are used in both systems but they are updated continuously during the period in perpetual inventory system whereas in periodic inventory system they are updated only at the end of the period.

• Purchases Account and Purchase Returns and Allowances Account are only used in periodic inventory system and are updated continuously. In perpetual inventory system purchases are directly debited to inventory account and purchase returns are directly credited to inventory account.

• Sale Transaction is recorded via two journal entries in perpetual system. One of them records the sale value of inventory whereas the other records cost of goods sold. In periodic inventory system, only one entry is made.

• Closing Entries are only required in periodic inventory system to update inventory and cost of goods sold. Perpetual inventory system does not require closing entries for inventory account.