Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Inventory valuation: Period-end vs continuous inventory records

  • As pointed out in our examination of the International Accounting Standard (IAS 2)
  • There are two accepted methods of keeping inventory records:
    1. The traditional period-end / periodic and
    2. Continuous inventory records
  • These methods are in turn used with Formula such as FIFO, LIFO and AVCO to get the actual cost of inventories sold, consumed or remaining at the end of the period

Period-end inventory records

  • Traditionally inventory is counted and compared to inventory records at the year-end or at the end of the accounting period
  • This is referred to as the ‘period-end’ or ‘periodic’ method of inventory counting
  • Inventory is only recorded in the ledger accounts at the end of the accounting period
  • During the year the relevant sales and purchases are recorded but the increase and decrease in inventory assets is ignored
  • The movement in inventory is only considered on an annual/periodic basis hence the name of the method
  • At the end of the given period the:
  • Opening Inventory is combined with the additional purchases throughout the period and the closing inventory deducted in order to obtain the Cost of Sales for the given period

Continuous Inventory Records

  • As an alternative an entity could keep an up to date record of its inventories
  • Every time there is a delivery or at much more frequent intervals the carrying amount of inventories are updated
  •  This is referred to as ‘continuous’ inventory counting
  • Although this is time consuming it is now much more easier to do this due to the rise in use of automated accounting and business systems

Advantages of periodic records

  • Usually much cheaper than the cost of maintaining a continuous record system
  • Even the continuous system does not yield accurate results since a stock take will be required eventually to verify the data e.g. stolen or damaged inventories cannot be identified by either methods

Advantages of Continuous Records

  • Up to date information that is useful for inventory control purposes
  • It makes calculating the inventory figures at the end of the period easier as the business will have a better idea of inventory levels
  • Stock out periods are minimised while excessive stock build ups of certain lines of inventory is minimised

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