Chapter 10, Problem 10.1Q

How is inventory tracked under a perpetual inventory system?

To determine

The system to track inventory under perpetual inventory system.

Answer to Problem 10.1Q

Perpetual inventory system refers to the system in which the change in position of inventory is continuously recorded through the computer system. This system traces the transaction from beginning to end. It is the most basic and important system for inventory accounting. With this system, the organization keeps the updated accounting record of inventory purchase.

Explanation of Solution

In this system, the inventory is updated with each transaction. The position of inventory changes with each purchase and sale. The count of inventory increases with purchase of each unit and decrease with the sale of each unit. Under this system, the inventory is updated continuously with each transaction.

It decreases the efforts required for inventory counting. It presents the information related to physical inventory counting, cost of goods sold and gross profit at any moment. It reduced the error related to inventory physical counting. At the end of accounting period each company wants to know the status of physical inventory, the reason behind is to adjust the difference between actual inventory and perpetual record occurred due to theft, obsolescence or damage. This system helps to determine the accuracy of the perpetual inventory system.

Conclusion

Thus, the perpetual inventory system helps to update each transaction on continues basis and reduce the error.