How to Do Adjusting Entries for Inventory

There are two types of inventory system, periodic and perpetual inventory system. In a periodic inventory system, the inventory holder keeps an updated record of the inventory that is also called a real-time inventory record. In the perpetual inventory statement, the inventory holder undermines the need to continuously evaluate the inventory and performs the task when the physical count of inventory is performed. No matter what system you use, the inventory holders often find a mismatch between the inventory reported and inventory at hand and this is often eliminated by adjusting inventories.

Instructions

  • 1

    Check physical inventory

    In order to be certain about the mismatch and the extent of mismatch, one should always check the physical inventory. Checking the physical inventory carefully will facilitate the accountant in comparing results of the inventory reported and inventory actually present in the stock. It is highly recommended that the company should stop all of its operations during the inspection of physical inventory as otherwise it will be impossible for the people to keep track of the current inventory. For this, employees of the company manually count and record all of the stock available in the warehouse.

  • 2

    Adjusting entries for the periodic inventory system

    Under the periodic system, the change in inventory is only recorded when the employees physically count the inventory. For this, they compare the inventory reported and currently available in the warehouse and the difference is known as adjusting entries for the periodic inventory system. In order to adjust entries, the owner will have to make changes to the credit to purchases, debit or credit to inventory and debit to Cost of Goods Sold. This helps the owner in finding the reason of a mismatch and then solving the issue. It can be due to the inventory destroyed or miscalculation.

  • 3

    Adjusting entries for perpetual inventory system

    Under this system, the inventory level of the company is affected by the recent purchases and sales of the inventory. They keep on recording these changes on a continuous basis and it is assumed that the theoretical changes will match the actual inventory at the end of a fiscal year. If there is a mismatch here, then the accountant will examine debit inventory, credit inventory and Cost of Merchandise Sold.

  • 4

    Inventory analysis

    In order to do adjusting entries, it is recommended that the accountant should perform inventory analysis and identify the amount of inventory destroyed or if there are any data entry errors.

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