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10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method

Perpetual Inventory System​

In a perpetual inventory system, inventory records are updated continuously with each purchase and sale. Cost of goods sold is recorded at the time of each sale.

Cost of Goods Sold (Perpetual)​

How it Works:

  • Each sale triggers a cost of goods sold entry
  • Cost is determined using cost flow assumption (FIFO, weighted average)
  • Inventory is reduced by cost amount
  • Inventory balance is always current

Example: FIFO with Perpetual System​

Transactions:

  • Jan 1: Purchase 100 units @ €10
  • Jan 10: Purchase 150 units @ €12
  • Jan 15: Sell 120 units
  • Jan 20: Purchase 200 units @ €14
  • Jan 25: Sell 150 units

FIFO Cost Flow:

Jan 1: Purchase

321000 Inventory                   €1,000
400000 Accounts Payable                        €1,000
Purchase 100 units @ €10

Jan 10: Purchase

321000 Inventory                   €1,800
400000 Accounts Payable                        €1,800
Purchase 150 units @ €12

Inventory Balance:

  • 100 units @ €10 = €1,000
  • 150 units @ €12 = €1,800
  • Total: 250 units = €2,800

Jan 15: Sale (120 units)

  • FIFO: Sell oldest first
  • 100 units @ €10 + 20 units @ €12 = €1,000 + €240 = €1,240

Sale Entry:

510000 Cash (or 410000 Receivable) €[selling price]
700000 Sales Revenue                          €[selling price]

COGS Entry:

602000 Cost of Goods Sold          €1,240
321000 Inventory                               €1,240

Remaining Inventory:

  • 130 units @ €12 = €1,560

Jan 20: Purchase

321000 Inventory                   €2,800
400000 Accounts Payable                        €2,800
Purchase 200 units @ €14

Inventory Balance:

  • 130 units @ €12 = €1,560
  • 200 units @ €14 = €2,800
  • Total: 330 units = €4,360

Jan 25: Sale (150 units)

  • FIFO: Sell oldest first
  • 130 units @ €12 + 20 units @ €14 = €1,560 + €280 = €1,840

COGS Entry:

602000 Cost of Goods Sold          €1,840
321000 Inventory                               €1,840

Ending Inventory:

  • 180 units @ €14 = €2,520

Summary:

  • Cost of Goods Sold: €1,240 + €1,840 = €3,080
  • Ending Inventory: €2,520
  • Total: €5,600 ✓

Example: Weighted Average with Perpetual System​

Same Transactions with Weighted Average:

Jan 1: Purchase 100 units @ €10

  • Inventory: 100 units @ €10 = €1,000
  • Average: €10

Jan 10: Purchase 150 units @ €12

  • Inventory: 250 units = €2,800
  • Average: €2,800 ÷ 250 = €11.20

Jan 15: Sell 120 units @ €11.20

  • COGS: 120 × €11.20 = €1,344
  • Remaining: 130 units @ €11.20 = €1,456

Jan 20: Purchase 200 units @ €14

  • Inventory: 330 units = €3,256
  • Average: €3,256 ÷ 330 = €9.87

Wait, that doesn't seem right. Let me recalculate:

Jan 20: Purchase 200 units @ €14

  • Previous: 130 units @ €11.20 = €1,456
  • New: 200 units @ €14 = €2,800
  • Total: 330 units = €4,256
  • Average: €4,256 ÷ 330 = €12.90

Jan 25: Sell 150 units @ €12.90

  • COGS: 150 × €12.90 = €1,935
  • Remaining: 180 units @ €12.90 = €2,322

Summary:

  • Cost of Goods Sold: €1,344 + €1,935 = €3,279
  • Ending Inventory: €2,322
  • Total: €5,601 (rounding difference)

Perpetual vs. Periodic Comparison​

Same Data, Different Methods:

FIFO:

  • Periodic COGS: €3,080
  • Perpetual COGS: €3,080
  • Same result (FIFO gives same result in both systems)

Weighted Average:

  • Periodic COGS: €3,361 (one average for period)
  • Perpetual COGS: €3,279 (moving average)
  • Different result (moving average recalculates with each purchase)

Advantages of Perpetual System​

Benefits:

  • Always know current inventory
  • Cost of goods sold recorded at sale
  • Better inventory control
  • Easier to detect theft
  • No need to wait for physical count

Luxembourg Considerations​

Perpetual System:

  • Most modern businesses use perpetual
  • Required for better inventory control
  • Supports VAT tracking
  • Easier for multiple VAT rates
  • Better for compliance

Luxembourg Compliance Note​

For perpetual inventory in Luxembourg:

  • Must use consistent valuation method
  • Must update with each transaction
  • Must reconcile with physical counts
  • Must comply with PCN Class 3
  • Must support inventory values
  • Must handle VAT correctly

Think It Through​

Why does weighted average give different results in periodic vs. perpetual systems? Which method is more accurate?