More on Perpetual Inventory

Inventory is an asset and is shown in the balance sheet at its cost. As items are sold from this inventory, their costs are removed from the balance sheet and transferred into the cost of goods sold, which is offset against sales revenue in the income statement.

In a perpetual inventory system, entries in the accounting records parallel this flow of costs. When merchandise is purchased, its cost (net of allowable cash discounts) is debited to the asset account Inventory. As the merchandise is sold, its cost is removed from the Inventory account and debited to the Cost of Goods Sold account.

In reality, for many companies, it is not quite that simple. That is because of the lapse of time between receiving an item into inventory and receiving and recording the vendor's invoice for the item. The cost of the item at receiving time, as known by the purchasing company, may very well not be the actual cost as will be known when the vendor invoice finally arrives. In fact, the item may even be sold before its actual cost is known.

Maintaining a comprehensive perpetual inventory can be a very complex task, and most perpetual inventory systems fall short of completing the process without human intervention. MyBooks uses temporary holding accounts, such as Uninvoiced Receipts, Physical Discrepancies and RMA Holdings, to juggle and reconcile all the numbers as accurately and transparently as possible, resulting in a very solid inventory accounting system.