Inventory Control

Inventory Control or Stock control can be broadly defined as "the activity of checking a shop’s
stock".[1] More specifically inventory control may refer to:

 In operations management, logistics and supply chain management, the technological system
and the programmed software necessary for managing inventory
 In economics and operations management, the inventory control problem, which aims to reduce
overhead cost without hurting sales? It answers the 3 basic questions of any supply chain:
When? Where? How much?
 In the field of loss prevention, systems designed to introduce technical barriers to shoplifting

Inventory Control Systems

An inventory control system is a system the encompasses all aspects of
managing a company's inventories; purchasing, shipping, receiving, tracking,
warehousing and storage, turnover, and reordering. In different firms the
activities associated with each of these areas may not be strictly contained
within separate subsystems, but these functions must be performed in
sequence in order to have a well-run inventory control system. Computerized
inventory control systems make it possible to integrate the various functional
subsystems that are a part of the inventory management into a single
cohesive system.

In today's business environment, even small and mid-sized businesses have

come to rely on computerized inventory management systems. Certainly,
there are plenty of small retail outlets, manufacturers, and other businesses
that continue to rely on manual means of inventory tracking. Indeed, for some
small businesses, like convenience stores, shoe stores, or nurseries,
purchase of an electronic inventory tracking system might constitute a
wasteful use of financial resources. But for other firms operating in industries
that feature high volume turnover of raw materials and/or finished products,
computerized tracking systems have emerged as a key component of
business strategies aimed at increasing productivity and maintaining
competitiveness. Moreover, the recent development of powerful computer
programs capable of addressing a wide variety of record keeping needs—
including inventory management—in one integrated system have also
contributed to the growing popularity of electronic inventory control options.
Given such developments, it is little wonder that business experts commonly
cite inventory management as a vital element that can spell the difference
between success and failure in today's keenly competitive business world.
Writing inProduction and Inventory Management Journal, Godwin Udo described
telecommunications technology as a critical organizational asset that can help
a company realize important competitive gains in the area of inventory
management. He noted that companies that make good use of this technology
are far better equipped to succeed than those who rely on outdated or
unwieldy methods of inventory control.

COMPUTERS AND INVENTORY

Automation can dramatically impact all phases of inventory management,
including counting and monitoring of inventory items; recording and retrieval of
item storage location; recording changes to inventory; and anticipating
inventory needs, including inventory handling requirements. This is true even
of stand-alone systems that are not integrated with other areas of the
business, but many analysts indicate that productivity—and hence
profitability—gains that are garnered through use of automated systems can
be further increased when a business integrates its inventory control systems
with other systems such as accounting and sales to better control inventory
levels. As Dennis Eskow noted in PC Week, business executives are
"increasingly integrating financial data, such as accounts receivable, with
sales information that includes customer histories. The goal: to control
inventory quarter to quarter, so it doesn't come back to bite the bottom line.
Key components of an integrated system '¦ are general ledger, electronic data
interchange, database connectivity, and connections to a range of vertical
business applications."
The Future of Inventory Control Systems
New technologies have greatly improved the tools used to manage
inventories. Powerful computer systems that are linked into networks are now
able to receive information from handheld devises. The wireless handheld
devices scan bar codes on inventory items and send data to a tracking
database in real time. The increased efficiency of inventory systems over the
past 25 years made some things possible that would have been impossible in
earlier times, like the popular just-in-time manufacturing system.
The newest trend in the area of inventory control and management are
vendor-managed inventory (VMI) systems and agreements. In a VMI system
distributors and/or manufacturers agree to take over the inventory
management for their customers. Based on daily reports sent automatically
from the customer to the distributor, the distributor replenishes the customers
stocks as needed. The distributor or manufacturer sees what is selling and
makes all necessary arrangements to send the customer new products or
parts automatically. No phone calls or paperwork are necessary allowing the
supply chain process to remain uninterrupted.
The benefits that can accrue to both parties in a VMI arrangement are
noteworthy. Both parties should experience a savings of time and labor. The
customer is able to maintain fewer items in stock and can rely upon a steady
flow of products or parts. The vendor or distributor benefits in two ways. First,
a supplier is able to better anticipate production requirements. Second, the
supplier benefits from a strong relationship with the customer, one that is
more difficult to alter than would be a vendor-customer relationship in which
such automated systems did not exist.
As with all outsourcing arrangements, there are potential negatives to a VMI
system. The first is the partial loss of control experienced by the customer in
managing his or her own inventories. Second is the problem this type of
system poses on a vendor in the case of volatile sales periods. It is very
difficult for a distributor or manufacturer to hold large inventories for one
customer on a VMI system who is experiencing a slowdown in sales while
having to ramp up for another customer who is experiencing rising demand.
Both parties to a VMI agreement must weight the pros and cons of such a
system thoroughly and be sure to include in any VMI agreement prearranged
methods for dealing with periods of volatile sales patterns. The popularity of
VMI suggests that there are many applications in which these systems
produce net benefits for both parties.

WAREHOUSE LAYOUT AND OPERATION

The trend toward automation in inventory management naturally has moved
into the warehouse as well. Citing various warehousing experts, Sarah Bergin
contended inTransportation and Distribution magazine that "the key to getting
productivity gains from inventory management '¦ is placing real-time intelligent
information processing in the warehouse. This empowers employees to take
actions that achieve immediate results. Real-time processing in the
warehouse uses combinations of hardware including material handling and
data collection technologies. But according to these executives, the intelligent
part of the system is sophisticated software which automates and controls all
aspects of warehouse operations."
Another important component of good inventory management is creation and
maintenance of a sensible, effective warehousing design. A well-organized,
user-friendly warehouse layout can be of enormous benefit to small business
owners, especially if they are involved in processing large volumes of goods
and materials. Conversely, an inefficient warehouse system can cost
businesses dearly in terms of efficiency, customer service, and, ultimately,
profitability.
Transportation and Distribution magazine cited several steps that businesses
utilizing warehouse storage systems can take to help ensure that they get the
most out of their facilities. It recommended that companies utilize the following
tools:
Stock locator database—"The stock locator database required for proactive
decision making will be an adjunct of the inventory file in a state-of-the-art
space management system. A running record will be maintained of the stock
number, lot number, and number of pallet loads in each storage location. Grid
coordinates of the reserve area, including individual rack tier positions, must
therefore be established, and the pallet load capacity of all storage locations
must be incorporated into the database."
Grid coordinate numbering system—Warehouse numbering system should be
developed in conjunction with the storage layout, and should be user-friendly
so that workers can quickly locate currently stocked items and open storage
spaces alike.
Communication systems—Again, this can be a valuable investment if the
business's warehouse requirements are significant. Such facilities often utilize
fork lift machinery that can be used more effectively if their operators are not
required to periodically return to a central assignment area. Current
technology, makes it possible for the warehouse computer system to interact
with terminal displays or other communications devices on the fork lifts
themselves. "Task assignment can then be made by visual display or printout,
and task completion can be confirmed by scanning, keyboard entry, or voice
recognition," observed Transportation and Distribution.
Maximization of storage capacity—Warehouses that adhere to rigid "storage
by incoming lot size" storage arrangements do not always make the best use
of their space. Instead, businesses should settle on a strategy that eases
traffic congestion and best eases problems associated with ongoing turnover
in inventory.
Some companies choose to outsource their warehouse functions. "This allows
a company that isn't as confident in running their own warehousing operations
to concentrate on their core business and let the experts worry about keeping
track of their inventory," wrote Bergin. Third-party inventory control operations
can provide companies with an array of valuable information, including
analysis of products and spare parts, evaluations of their time sensitivity, and
information on vendors. Of course, businesses weighing whether to outsource
such a key component of their operation need to consider the expense of
such a course of action, as well as their feelings about relinquishing that level
of control.

Stock control systems[edit]

Inventory control is also about knowing where all your stock is and ensuring everything is accounted
for at any given time.[2] An inventory control system or a computerized inventory system is a process
for managing and locating objects or materials.[3] In common usage, the term may also refer to
just the software components. Many shops now use stock control systems. The term "stock control
system" can be used to include various aspects of controlling the amount of stock on the shelves
and in the stockroom and how reordering happens. Typical features of stock control software
include:[4]

 Ensuring that the products are on the shelf in shops in just the right quantity.
 Recognizing when a customer has bought a product.
 Automatically signalling when more products need to be put on the shelf from the stockroom.
 Automatically reordering stock at the appropriate time from the main warehouse.
 Automatically producing management information reports that could be used both by local
managers and at head office.

These might detail what has sold, how quickly and at what price, for example. Reports could be used
to predict when to stock up on extra products, for example, at Christmas or to make decisions
about special offers, discontinuing products and so on. Sending reordering information not only to
the warehouse but also directly to the factory producing the products to enable them to optimize
production.

Stock Control A stock control system should keep you aware of the quantity of each kind of merchandise
on hand. An effective system will provide you with a guide for what, when, and how much to buy of
each style, color, size, price and brand. It will reduce the number of lost sales resulting from being out of
stock of merchandise in popular demand. The system will also locate slow selling articles and help
indicate changes in customer preferences. The size of your establishment and the number of people
employed are determining factors in devising an effective stock control plan. Can you keep control by
observation? Should you use on-hand/onorder/sold records? Detachable ticket stubs? Checklists?
And/or physical inventory? If so, how often? With the observation method (the eyeball system), unless
the people using it have an unusually sharp sense of quantity and sales patterns, it is difficult to keep a
satisfactory check on merchandise depletion. It means that you record shortages of goods or reorders as
the need for them occurs to you. Without a better checking system, orders may only be placed at the
time of the salesman's regular visit, regardless of when they are actually needed. Although it may be the
simplest system, it also can often result in lost sales or production delays. Detachable stubs or tickets
placed on merchandise provide a good means of control. The stubs, containing information identifying
the articles, are removed at the time the items are sold. The accumulated stubs are then posted
regularly to the perpetual inventory system by hand or through the use of an optical scanner. A
checklist, often provided by wholesalers, is another counting tool. The checklist provides space to record
the items carried, the selling price, cost price, and minimum quantities to be ordered of each. It also
contains a column in which to note whether the stock on hand is sufficient and when to reorder. This is
another very simple device that provides the level of information required to make knowledgeable
decisions about effective inventory management. Most smaller operations today, except for the very
smallest, are using some form of a perpetual online system to record the movement of inventories into
and out of their facilities. In a retail operation, the clerk at the register merely scans the ticket with a
reader, and the system shows the current price and removes the item from the inventory control
system. A similar process occurs in a manufacturing operation, except that the "sale" is actually a
transfer of the inventory from control to production. This is a particularly critical system in a large
operation such as a grocery store where they regularly maintain 12,000 plus items. Often a vendor will
provide on-site or computerized assistance needed to help their smaller customers maintain a good
understanding of their own inventory levels and so keep them in balance

Inventory Control Records Inventory control records are essential to making buy-and-sell decisions.
Some companies control their stock by taking physical inventories at regular intervals, monthly or
quarterly. Others use a dollar inventory record that gives a rough idea of what the inventory may be
from day to day in terms of dollars. If your stock is made up of thousands of items, as it is for a
convenience type store, dollar control may be more practical than physical control. However, even with
this method, an inventory count must be taken periodically to verify the levels of inventory by item.
Perpetual inventory control records are most practical for big-ticket items. With such items it is quite
suitable to hand count the starting inventory, maintain a card for each item or group of items, and
reduce the item count each time a unit is sold or transferred out of inventory. Periodic physical counts
are taken to verify the accuracy of the inventory card. Out-of-stock sheets, sometimes called want
sheets, notify the buyer that it is time to reorder an item. Experience with the rate of turnover of an
item will help indicate the level of inventory at which the unit should be reordered to make sure that the
new merchandise arrives before the stock is totally exhausted. Open-to-buy records help to prevent
ordering more than is needed to meet demand or to stay within a budget. These records adjust your
order rate to the sales rate. They provide a running account of the dollar amount that may be bought
without departing significantly from the pre- established inventory levels. An open-to-buy record is
related to the inventory budget. It is the difference between what has been budgeted and what has
been spent. Each time a sale is made, open-to-buy is increased (inventory is reduced). Each time
merchandise is purchased; open-to-buy is reduced (inventory is increased). The net effect is to help
maintain a balance among product lies within the business, and to keep the business from getting
overloaded in one particular area. Purchase order files keep track of what has been ordered and the
status or expected receipt date of materials. It is convenient to maintain these files by using a copy of
each purchase order that is written. Notations can be added or merchandise needs updated directly on
the copy of the purchase order with respect to changes in price or delivery dates. Supplier files are
valuable references on suppliers and can be very helpful in negotiating price, delivery and terms. Extra
copies of purchase orders can be used to create these files, organized alphabetically by supplier, and can
provide a fast way to determine how much business is done with each vendor. Purchase order copies
also serve to document ordering habits and procedures and so may be used to help reveal and/or
resolve future potential problems. Returned goods files provide a continuous record of merchandise
that has been returned to suppliers. They should indicate amounts, dates and reasons for the returns.
This information is useful in controlling debits, credits and quality Issues. Price books, maintained in
 alphabetical order according to supplier, provide a record of purchase prices, selling prices, markdowns,
and markups. It is important to keep this record completely up to date in order to be able to access the
latest price and profit information on materials purchased for resale.

Setting of Various Stock Levels

Determination of various levels of inventory is one of the prime responsibility

of Materials Department. The purpose behind setting of different stock levels is
to ensure smooth operation of the enterprise and allocation of appropriate
amount of monetary resources to different items in the inventory. A number of
factors affect the determination of stock levels for different items. Some of
these are:

 Rate of consumption
 Lead time
 Storage /warehousing /carrying costs
 Insurance cost
 Seasonal considerations
 Price fluctuations
 Economic Order Quantity (EOQ)
 Quality of raw material
 Availability of space
 Availability of funds
 Government and other legal and statutory requirements.
A systematic material control results in economy and efficiency in the
maintenance of each item of inventory and at the same time ensures that it is
available as and when required. It helps in avoiding blocking up of funds in
 unnecessary stock items. Now, coming back to the topic under discussion, to
ensure smooth running of production process, the materials department of an
enterprise sets different levels for each item of inventory. These levels are:

1. Maximum level
2. Minimum level
3. Reorder level
4. Danger or safety stock level
Now let’s have a detailed discussion on each one of these.

1. Maximum level: This is the maximum quantity above which stock should
never be held at any time. It is fixed after considering the following factors:
 Investment required in stores, raw materials and other items of inventory
 Availability of storage space
 Lead time for delivery of materials
 Obsolescence rate
 Consumption rate of materials
 Economic Order Quantity
 Storage and Insurance costs
 Price advantage due to bulk purchases.
Maximum Level can be calculated as:

Maximum Level=Re-order Level × Re-order Quantity –( Minimum

consumption × Minimum Re-order period)
2. Minimum Level: This is the minimum level below which an item of stoeck
should never be allowed to fall. Minimum level depends on the following
factors:
 Consumption rate of materials.
 Lead time for delivery of materials.
 Production requirements.
 Minimum order size fixed by suppliers.
Minimum level is computed using the following formula:

Minimum level=Re-order level – (Normal consumption × Normal reorder-

period)
3. Danger or safety level: Safety or reserve stock is fixed to avoid stock out
conditions. Carefully fixed safety stock level helps in minimising stock-out and
carrying costs. This level is fixed usually between minimum level and zero
level. On reaching this level, the storekeeper stops issuing materials. However
sometimes for preventive measures, this stock is fixed above minimum level.
Formula for calculating Danger level is:

Danger/Safety level= Ordering Level–(Average rate of consumption×Re-order

period)
Or
(Maximum rate of consumption–Average rate of consumption)×Lead Time
4. Ordering Level: Ordering Level is that level on reaching which, a fresh
order is placed with the suppliers. This level depends on:
 Annual consumption of an item.
 Lead time.
 Expected usage during lead period.
 Minimum Level.
Ordering level is calculated using the formula:

Ordering Level= Minimum Level + consumption during lead period

Or
Maximum consumption × Lead time + Safety stock
or
Maximum consumption × Maximum re-order period

DEFINITION of 'Average Inventory'

A calculation comparing the value or number of a particular good or set of goods during two
or more specified time periods. Average inventory is the median value of an inventory
throughout a certain time period. A basic calculation for average inventory would be:

(Current Inventory + Previous Inventory) / 2

Or

Average Stock level shows the average stock held by a firm. The average stock level can be
calculated with the help of following formula.

Average Stock Level = Minimum Level + (1/2Re-order Quantity)

OR
Average Stock Level = (Minimum Level + Maximum Level)/2

Inventory Systems
Each of the three cost flow assumptions listed above can be used in either of two systems (or methods) of
inventory:

A. Periodic
B. Perpetual
A. Periodic inventory system. Under this system the amount appearing in the Inventory account is not
updated when purchases of merchandise are made from suppliers. Rather, the Inventory account is commonly
updated or adjusted only once—at the end of the year. During the year the Inventory account will likely show
only the cost of inventory at the end of the previous year.
Under the periodic inventory system, purchases of merchandise are recorded in one or
more Purchasesaccounts. At the end of the year the Purchases account(s) are closed and the Inventory account
is adjusted to equal the cost of the merchandise actually on hand at the end of the year. Under the periodic
system there is noCost of Goods Sold account to be updated when a sale of merchandise occurs.
In short, under the periodic inventory system there is no way to tell from the general ledger accounts the
amount of inventory or the cost of goods sold.

B. Perpetual inventory system. Under this system the Inventory account is continuously updated. The
Inventory account is increased with the cost of merchandise purchased from suppliers and it is reduced by the
cost of merchandise that has been sold to customers. (The Purchases account(s) do not exist.)
Under the perpetual system there is a Cost of Goods Sold account that is debited at the time of each sale for the
cost of the merchandise that was sold. Under the perpetual system a sale of merchandise will result in two
journal entries: one to record the sale and the cash or accounts receivable, and one to reduce inventory and to
increase cost of goods sold.

Inventory Systems and Cost Flows Combined

The combination of the three cost flow assumptions and the two inventory systems results in six available
options when accounting for the cost of inventory and calculating the cost of goods sold:

A1. Periodic FIFO

A2. Periodic LIFO
A3. Periodic Average
B1. Perpetual FIFO
B2. Perpetual LIFO
B3. Perpetual Average

A1. Periodic FIFO

"Periodic" means that the Inventory account is not routinely updated during the accounting period. Instead, the
cost of merchandise purchased from suppliers is debited to an account called Purchases. At the end of the
accounting year the Inventory account is adjusted to equal the cost of the merchandise that has not been sold.
The cost of goods sold that will be reported on the income statement will be computed by taking the cost of the
goods purchased and subtracting the increase in inventory (or adding the decrease in inventory).

"FIFO" is an acronym for First In, First Out. Under the FIFO cost flow assumption, the first (oldest) costs are
the first ones to leave inventory and become the cost of goods sold on the income statement. The last (or
recent) costs will be reported as inventory on the balance sheet.
Remember that the costs can flow differently than the goods. If the Corner Shelf Bookstore uses FIFO, the
owner may sell the newest book to a customer, but is allowed to report the cost of goods sold as $85 (the first,
oldest cost).

Let's illustrate periodic FIFO with the amounts from the Corner Shelf Bookstore:
A2. Periodic LIFO
"Periodic" means that the Inventory account is not updated during the accounting period. Instead, the
cost of merchandise purchased from suppliers is debited to an account called Purchases. At the end
of the accounting year the Inventory account is adjusted to equal the cost of the merchandise that is
unsold. The other costs of goods will be reported on the income statement as the cost of goods sold.
"LIFO" is an acronym for Last In, First Out. Under the LIFO cost flow assumption, the last (or
recent) costs are the first ones to leave inventory and become the cost of goods sold on the income
statement. The first (or oldest) costs will be reported as inventory on the balance sheet.
Remember that the costs can flow differently than the goods. In other words, if Corner Shelf
Bookstore uses LIFO, the owner may sell the oldest (first) book to a customer, but can report the
cost of goods sold of $90 (the last cost).

It's important to note that under LIFO periodic (not LIFO perpetual) we wait until the entire year is
over before assigning the costs. Then we flow the year's last costs first, even if those goods
arrived after the last sale of the year. For example, assume the last sale of the year at the Corner
Shelf Bookstore occurred on December 27. Also assume that the store's last purchase of the year
arrived on December 31. Under LIFO periodic, the cost of the book purchased on December 31 is
sent to the cost of goods sold first, even though it's physically impossible for that book to be the one
sold on December 27. (This reinforces our previous statement that the flow of costs does not have to
correspond with the physical flow of units.)
Let's illustrate periodic LIFO by using the data for the Corner Shelf Bookstore:
As before we need to account for the total goods available for sale: 5 books at a cost of $440. Under
periodic LIFO we assign the last cost of $90 to the one book that was sold. (If two books were sold,
$90 would be assigned to the first book and $89 to the second book.) The remaining $350 ($440 -
$90) is assigned to inventory. The $350 of inventory cost consists of $85 + $87 + $89 + $89. The
$90 assigned to the book that was sold is permanently gone from inventory.

If the bookstore sold the textbook for $110, its gross profit under periodic LIFO will be $20 ($110 -
$90). If the costs of textbooks continue to increase, LIFO will always result in the least amount of
profit. (The reason is that the last costs will always be higher than the first costs. Higher costs result
in less profits and usually lower income taxes.)

A3. Periodic Average

Under "periodic" the Inventory account is not updated and purchases of merchandise are recorded in
an account called Purchases. Under this cost flow assumption an average cost is calculated using
the total goods available for sale (cost from the beginning inventory plus the costs of all subsequent
purchases made during the entire year). In other words, the periodic average cost is calculated after
the year is over—after all the purchases of the year have occurred. This average cost is then applied
to the units sold during the year as well as to the units in inventory at the end of the year.
As you can see, our facts remain the same-there are 5 books available for sale for the year 2014
and the cost of the goods available is $440. The weighted average cost of the books is $88 ($440 of
cost of goods available ÷ 5 books available) and it is used for both the cost of goods sold and for
the cost of the books in inventory.
B1. Perpetual FIFO
Under the perpetual system the Inventory account is constantly (or perpetually) changing. When a
retailer purchases merchandise, the retailer debits its Inventory account for the cost; when the
retailer sells the merchandise to its customers its Inventory account is credited and its Cost of Goods
Sold account is debited for the cost of the goods sold. Rather than staying dormant as it does with the
periodic method, the Inventory account balance is continuously updated.
Under the perpetual system, two transactions are recorded when merchandise is sold: (1) the sales
amount is debited to Accounts Receivable or Cash and is credited to Sales, and (2) the cost of the
merchandise sold is debited to Cost of Goods Sold and is credited to Inventory. (Note: Under the
periodic system the second entry is not made.)
With perpetual FIFO, the first (or oldest) costs are the first moved from the Inventory account and
debited to the Cost of Goods Sold account. The end result under perpetual FIFO is the same as
under periodic FIFO. In other words, the first costs are the same whether you move the cost out of
inventory with each sale (perpetual) or whether you wait until the year is over (periodic).

B2. Perpetual LIFO

Under the perpetual system the Inventory account is constantly (or perpetually) changing. When a
retailer purchases merchandise, the retailer debits its Inventory account for the cost of the
merchandise. When the retailer sells the merchandise to its customers, the retailer credits its
Inventory account for the cost of the goods that were sold and debits its Cost of Goods Sold account
for their cost. Rather than staying dormant as it does with the periodic method, the Inventory account
balance is continuously updated.
Under the perpetual system, two transactions are recorded at the time that the merchandise is sold:
(1) the sales amount is debited to Accounts Receivable or Cash and is credited to Sales, and (2) the
cost of the merchandise sold is debited to Cost of Goods Sold and is credited to Inventory. (Note:
Under the periodic system the second entry is not made.)

With perpetual LIFO, the last costs available at the time of the sale are the first to be removed from the
Inventory account and debited to the Cost of Goods Sold account. Since this is the perpetual system
we cannot wait until the end of the year to determine the last cost—an entry must be recorded at the
time of the sale in order to reduce the Inventory account and to increase the Cost of Goods Sold
account.
If costs continue to rise throughout the entire year, perpetual LIFO will yield a lower cost of goods
sold and a higher net income than periodic LIFO. Generally this means that periodic LIFO will result
in less income taxes than perpetual LIFO. (If you wish to minimize the amount paid in income taxes
during periods of inflation, you should discuss LIFO with your tax adviser.)
Once again we'll use our example for the Corner Shelf Bookstore:

Let's assume that after Corner Shelf makes its second purchase in June 2014, Corner Shelf sells
one book. This means the last cost at the time of the sale was $89. Under perpetual LIFO the following
entry must be made at the time of the sale: $89 will be credited to Inventory and $89 will be debited
to Cost of Goods Sold. If that was the only book sold during the year, at the end of the year the Cost
of Goods Sold account will have a balance of $89 and the cost in the Inventory account will
be $351 ($85 + $87 + $89 + $90).
If the bookstore sells the textbook for $110, its gross profit under perpetual LIFO will be $21 ($110 -
$89). Note that this is different than the gross profit of $20 under periodic LIFO.

B3. Perpetual Average

Under the perpetual system the Inventory account is constantly (or perpetually) changing. When a
retailer purchases merchandise, the costs are debited to its Inventory account; when the retailer
sells the merchandise to its customers the Inventory account is credited and the Cost of Goods Sold
account is debited for the cost of the goods sold. Rather than staying dormant as it does with the
periodic method, the Inventory account balance under the perpetual average is changing whenever
a purchase or sale occurs.
Under the perpetual system, two sets of entries are made whenever merchandise is sold: (1) the
sales amount is debited to Accounts Receivable or Cash and is credited to Sales, and (2) the cost of
the merchandise sold is debited to Cost of Goods Sold and is credited to Inventory. (Note: Under the
periodic system the second entry is not made.)

Under the perpetual system, "average" means the average cost of the items in inventory as of the date
of the sale. This average cost is multiplied by the number of units sold and is removed from the
Inventory account and debited to the Cost of Goods Sold account. We use the average as of the time
of the sale because this is aperpetual method. (Note: Under the periodic system we wait until the year
is over before computing the average cost.)
Let's use the same example again for the Corner Shelf Bookstore:

DEFINITION of 'Stock Record'

An electronic system that helps brokerage firms keep track of the positions,
location and ownership of the securities it is holding. The stock record displays
the names of the real and beneficial owners as well as the names of the
securities and must be updated any time a trade is executed. Since today's
brokerage firms hold shares in street name for investors, meticulous
bookkeeping is necessary for keeping track of the actual owners of the securities.