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What is perpetual inventory system?

What is perpetual inventory system?

Solution

The perpetual inventory system is the system under which a continuous record of changes in inventory is maintained in the inventory account itself — all purchases and issues/sales are recorded directly in the inventory account as they occur, so the account balance reflects the inventory on hand at any moment.

Accounting features: purchases, freight-in, purchase returns and allowances and purchase discounts are all recorded in inventory rather than in separate purchase accounts, and cost of goods sold is recognized for each sale by debiting cost of goods sold and crediting inventory; inventory acts as a control account supported by a subsidiary ledger of individual inventory records.

Reporting and practicality: ending inventory is reported within the trial balance and not as an adjustment, and computerized software with scanner-based recording at the cash register (as in retail stores in Nepal) has made the system cost-effective for many businesses.

Explore more questions

  1. 1.

    a. Who are the internal and external users of accounting information?

    b. What is value added statement? Also explain the objectives of value added statement.

    Practice
  2. 2.

    The XYZ Company's Statement of profit and Loss a/c and Statement of Financial Position for two years have been given below:

    Particulars Amount (Rs.)
    Sales 2,000,000
    Less: Cost of goods sold 1,200,000
    Gross Profit 800,000
    Less: Operating Expenses
    Depreciation 180,000
    Interest paid 20,000
    Debenture Premium 12,000
    Other operating Expenses 318,000
    Net Income before other Income 270,000
    Add: Profit from sale of fixed assets (book value Rs. 60,000) 10,000
    Net profit 280,000

    Statement of Financial Position of a Company for 2074 and 2075

    Capital & Liabilities 2074 2075
    Share Capital @ Rs. 100 per share 1,000,000 1,200,000
    Share Premium 100,000 120,000
    General Reserve 30,000 50,000
    12% Debenture 200,000 100,000
    Account payable 120,000 150,000
    Bank Overdraft 130,000 150,000
    Retained Earnings 100,000 380,000
    Total 1,680,000 2,150,000
    Assets
    Fixed Assets 1,000,000 1,200,000
    Investment 100,000 240,000
    Inventories 80,000 100,000
    Account Receivable 230,000 300,000
    Cash 250,000 300,000
    Preliminary expenses 20,000 10,000
    Total 1,680,000 2,150,000

    Required for 2075:

    • a. Current Ratio

    • b. Quick Ratio

    • c. Debt Equity Ratio

    • d. Debtors Turnover Ratio

    • e. Fixed Assets Turnover Ratio

    • f. Net Profit Ratio

    • g. Return on Equity

    • h. Return on Total Assets

    • i. Interest Coverage Ratio

    • j. Stock Turnover Ratio

    Long question Practice
  3. 3.

    The financial transaction of a trader are provided below:

    a. Started business with cash Rs. 300,000 and bank balance Rs. 100,000.

    b. Deposited into bank Rs. 150,000.

    c. Purchased merchandise goods for Rs. 50,000 on account.d. Sold merchandise goods on account for Rs. 170,000.

    e. Received a cheque from debtor, Rs. 142,500 after deduction of 5% discount. The cheque was banked immediately.

    f. Paid Rs. 45,000 to creditor by issuing a cheque after deduction 10% discount.

    g. Rs. 13,000 was paid for insurance premium.

    h. Paid utilities Rs. 10,000

    i. Paid office salary Rs. 26,000

    j. Rent paid Rs. 18,000 through cheque.

    Additional Information:

    a. Unsold stock recorded at Rs. 20,000

    b. Salaries remain unpaid amounted to Rs. 4,000

    c. Insurance premium includes prepaid Rs. 1,000

    Required:

    i. Journal entries for the financial transactions.

    ii. Triple column cash book.

    iii. Ledger accounts of Debtors and Creditors.

    iv. Trial balance

    Long question Practice
  4. 4.

    Discuss in brief about the disclosures required for financial statement under Nepal Financial Reporting Standard (NFRS).

    Practice
  5. 5.

    "Lease is a legal and biding contracts that set forth the terms of rental agreements in real estate and real and personal property". Discuss.

    Practice
  6. 6.

    a) The following information is available for GG Company on 31st Chaitra 2075

    Balance as per bank statement = Rs. 15,000

    Balance as per company records = Rs. 11,000

    Cheque not deposited upto 31st Chaitra = Rs. 2,400

    Bank service charge for the month = Rs. 100

    Bill receivable collected by bank only = Rs. 2,000

    Interest on bill is recorded on company = Rs. 500Outstanding cheque of Chaitra = Rs. 4,000

    Required : Bank Reconciliation Statement as on 31st Chaitra 2075.

    b) Define treasury stock with its features.

    Long question Practice