Inventory

The type and quantity of items stored in inventory can be accounted for on a periodic basis by using the periodic inventory system, which requires one to conduct a complete count of the physical inventory in order to obtain a calculation of the inventory cost. A more advanced method that does not require a complete inventory count is the perpetual inventory system; under this approach, one incrementally adds or subtracts inventory transactions to or from a beginning database of inventory records in order to maintain an ongoing balance of inventory quantities. The accuracy of the inventory records under this latter approach will likely degrade over time, so an ongoing cycle counting program is needed to maintain its accuracy level. The perpetual inventory system is highly recommended, because it avoids expensive periodic inventory counts, which also tend not to yield accurate results. Also, it allows the purchasing staff to have greater confidence in what inventory is on hand for purchasing planning purposes. Further, accountants can complete period-end financial statements more quickly, without having to guess at ending inventory levels. This chapter introduces the different types of inventory and explains how to do accounting and valuation of inventory.