PARRISH MODULE 5 INVENTORY-DIFFERENCES Please explain the differences between the following transactions. Both involve reduction in price of imperfect inventory but different accounts are used. In Transaction 2 the Periodic and Perpetual Method accounts used are exactly the same. Would you please explain, point out the differences and why they are recorded differently. Transaction 1. Reduction in price of imperfect inventory for $10 Periodic Method Accounts Payable or Cash 10 Purchase Allowances 10 Perpetual Method Accounts Payable or Cash 10 Inventory 10 Transaction 2. Reduction in price of imperfect items sold for $53; reduction allowed is $25 Periodic Method Sales Allowances 25 Accounts Payable or Cash 25 Perpetual Method Sales Allowances 25 Accounts Payable or Cash 25
PARRISH MODULE 5 INVENTORY-DIFFERENCES
Please explain the differences between the following transactions. Both involve reduction in price of imperfect inventory but different accounts are used. In Transaction 2 the Periodic and Perpetual Method accounts used are exactly the same. Would you please explain, point out the differences and why they are recorded differently.
Transaction 1.
Reduction in price of imperfect inventory for $10
Periodic Method
Accounts Payable or Cash 10
Purchase Allowances 10
Perpetual Method
Accounts Payable or Cash 10
Inventory 10
Transaction 2.
Reduction in price of imperfect items sold for $53; reduction allowed is $25
Periodic Method
Sales Allowances 25
Accounts Payable or Cash 25
Perpetual Method
Sales Allowances 25
Accounts Payable or Cash 25
Inventory Write-off and inventory write-down are 2 different concepts involved in the valuation of inventory.
A permanent reduction in the value of inventory is inventory write-off whereas a reduction in the sale value of the asset than its cost price is known as inventory write-down. In both these cases, the value of inventory would reduce.
Under the periodic inventory method, the value of inventory is determined at the end of every period or at different intervals determined by the company. A physical count of inventory is made at specified intervals and all adjustments are made accordingly. The regular transactions of purchases, sales, purchase return, sales return are routed through purchase account, sales accounts, purchase return account and sales return account respectively. Day to day transactions is not adjusted to the inventory account.
Under the perpetual inventory method, all the transactions affecting inventory are recorded through the inventory account. It is the most efficient method of recording inventory.
Damaged goods or imperfect goods do not have the same price as perfect or saleable goods. Their price is usually less than the price of the prefect or saleable goods. Such price reduction results in loss of inventory value and reduction in the amount paid/payable to the supplier.
Such reduction is adjusted through the purchase allowance account under the periodic inventory method as inventory account is not maintained in that method. Such a reduction is adjusted by crediting the inventory account and debiting cash/accounts payable accounts under the perpetual inventory method.
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