Information about Inventory Methods and Cost Flow Assumption

ACCOUNTING 1
Accounting
[Name of Writer]
[Name of Institution]

ACCOUNTING 2
Question 1
To: Mr and Mrs Spot
From: Accounting Expert
Date: January 2019
Subject: Information about Inventory Methods and Cost Flow Assumption
There are two different approaches in accounting for merchandising transactions or inventory
transactions which are Perpetual and Periodic Inventory System. Perpetual Inventory System
requires to record transactions as they occur and keep records up to date. When sale is made, two
entries are required first to recognize revenue and second for cost of goods sold. Therefore, cost
of goods sold will remain update under perpetual system. While in periodic inventory system,
records are update at end. Cost of goods sold is found after taking physical inventory and a short
formula. Majority of businesses use perpetual inventory system. Cost flow assumption is
necessary to understand when identical products have different unit cost. At the time of
recording, which item should be included in cost of goods sold whether old inventory items or
recently purchased items. There are three types of cost flow assumption Average Method, First-
In-First-Out and Last-in-First-Out. Average method values all sold units and remaining units at
average per unit cost. FIFO assumes to sell units which are purchased earlier while LIFO
assumes to sell units which are recently purchased.
I hope this piece of information would help you in understanding the difference between two
inventory methods and cost flow assumptions.
Perpetual Inventory System:
Jan 1, 2018 Cash 20000
Paid in Capital 20000
Issued share capital of 20000 (10000 * 2)
Jan 3, 2018 Inventory 2400
Accounts Payable 2400
Purchased Inventory from Plush Toys Ltd on credit

ACCOUNTING 3
Jan 6, 2018 Accounts Receivables 1600
Sales 1600
COGS 960
Inventory 960
Sold 160 soft Toys to Preschool on credit
Jan 9, 2018 Inventory 2100
Bank Account 2100
Purchased 300 Soft Toys from Plush Toys Ltd
Jan 12, 2018 Accounts Payable 2400
Bank Account 2400
Paid Plush Toys Ltd for purchases made on 3 January
Jan 15, 2018 Cash 1600
Account Receivables 1600
Received $1,600 from Rainbow Preschool
Jan 20, 2018 Accounts Receivables 2000
Sales 2000
COGS 1200
Inventory 1200
Sold 200 soft Toys to Sydney Children’s Hospital on credit
Jan 22, 2018 Inventory 1050
Bank Account 1050
Purchased 150 Soft Toys from Plush Toys Ltd
Jan 24, 2018 Accounts Payable 1050
Bank Account 1029
Purchase Discount 21
Paid Plush Toys Ltd for purchases made on 22 January