Question

What is involved with adjusting for merchandise inventory in periodic system? What is involved with adjusting entries under a perpetual system? Why is this done?

Answer 1

Periodic Inventory system doesn't record the inventory units all the time of the year. It only updates the ending inventory in the accounts only at the end of a specific period that's why its called Periodic Inventory system. The period can be anything 3 months, every 6 months or every year end.

During that period, all purchases are recorded into purchases accounts and everything is recorded at its $ amount. However, when the actual inventory count is taken at the year end - only then true costs of goods sold are determined and adjustments are required to be made in the accounts.

Also, unlike perpetual inventory, as the adjustments are made after a significant time, therefore, the adjustments made are also of large amounts.

The major reason why this is done is pretty obvious here that it helps to report a proper and correct amount in the financial reports.