ICAI Notes 4 - Inventories (Part - 3) CA Foundation Notes | EduRev

Fundamentals of Accounting for CA CPT

CA Foundation : ICAI Notes 4 - Inventories (Part - 3) CA Foundation Notes | EduRev

The document ICAI Notes 4 - Inventories (Part - 3) CA Foundation Notes | EduRev is a part of the CA Foundation Course Fundamentals of Accounting for CA CPT.
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There are two principal systems of determining the physical quantities and monetary value of inventories sold and in hand. One system is known as ‘Periodic Inventory System’ and the other as the ‘Perpetual Inventory System’. The periodic system is less expensive to use than the perpetual method. But the useful information obtained from perpetual system eclipses the cost consideration. These systems are distinguished on the basis of the actual records kept to ascertain the cost of goods sold and the closing inventory valuations.


Periodic inventory system is a method of ascertaining inventory by taking an actual physical count (or measure or weight) of all the inventory items on hand at a particular date on which inventory is required. It is because of actual physical count that the system is also called physical inventory system. The cost of goods sold is determined as shown below:

Opening inventory (known) + Purchases (known) - closing inventory (physically counted) = Cost of goods sold.

Periodic inventory system is simple and less expensive than the perpetual system. In this system, inventory account is adjusted at the end of the accounting period to determine cost of goods sold. This system suffers from various limitations:

(i) Physical inventory taking is required more than once a year for preparation of quarterly or half yearly financial statements thereby making this system more expensive.
(ii) Physical count of goods requires closure of normal operations of business.
(iii) As cost of goods sold is taken as residual figure, it includes loss of goods during the year.
(iv) Inventory control is not possible under this system. 


Perpetual inventory system is a system of recording inventory balances after each receipt and issue. In order to ensure accuracy of perpetuar inventory records, physical inventory should be checked and compared with recorded balances. Under this system, cost of goods issued is directly determined and inventory of goods is taken as residual figure with the help of inventory ledger in which flow of goods is recorded on continuous basis. The basic feature of this system is the maintenance of inventory ledger to have records of goods on continuous basis.

Perpetual inventory system helps to overcome the limitations of periodic system. As inventory is taken as residual figure, it includes loss of goods. However, the main limiting factor is the cost of using this system. 


Both the systems - Periodic Inventory System and Perpetual Inventory System are not mutually exclusive and complementary in nature. Distinction between both the systems can be explained as follows:



Periodic Inventory System

Perpetual Inventory System


This system is based on physical verification.

It is based on book records.


This system provides information about inventory and cost of goods sold at a particular date

It provides continuous information about inventory and cost of sales.


This system determines inventory and takes cost of goods sold as residual figure.

It directly determines cost of goods sold and computes inventory as balancing figure.


Cost of goods sold includes loss of goods as goods not in inventory are assumed to be sold.

Closing inventory includes loss of goods as all unsold goods are assumed to be in Inventory


Under this method, inventory control is not possible.

Inventory control can be exercised under this system.


This system is simple and less expensive.

It is costlier method.


Periodic system requires closure of business for counting of inventory.

Inventory can be determined without affecting the operations of the business.


Normally all operations are suspended for one or two days during the financial year and physical inventory is taken for everything in the godown or the store periodically. For the yearend inventory valuation, physical inventory taking is done during the last week of the financial year. If inventory taking is finished on 26th March, whereas accounting year ends on 31st March purchases and sales subsequent to 26th March are then separately adjusted. Later, a value is put on each item. The principle of cost or market price, whichever is lower, is applied either for the inventory as a whole or item by item.

Often, inventory taking cannot be carried out on the closing day. It is carried out a few days later or some times even a few days earlier. In such a case, the actual value of the inventory must be so adjusted as to relate it to the end of the year concerned. For doing so, it will be necessary to take into account the goods that have come in (purchases and sales returns) and those that have gone out (sales and purchase returns) during the interval between the close of the year and the date of actual inventory taking. Further, the adjustment of all goods must be on the basis of cost. Suppose, a firm that closes its books on 31st December, carried out the inventory taking on the 7th January next year and actual inventory was of the cost of Rs 78,500, during the period January 1 to 7 purchases were Rs 15,300 and sales Rs 25,000, the mark up being 25% on cost. The inventory on 31st December would be Rs 83,200 as shown below:

Inventory ascertained on January 778,500
Less : Purchases during the period Jan. 1 to 715,300

Add : Cost of goods sold during the period :

25,000 × (100/125)



illustration 6 

From the following particulars ascertain the value of Inventories as on 31st March, 2011:

Inventory as on 1.4.201014,250
Manufacturing Expenses15,000
Selling Expenses6,050
Administrative Expenses3,000
Financial Charges2,150

At the time of valuing inventory as on 31st March, 2010, a sum of Rs 1,750 was written off on a particular item, which was originally purchased for Rs 5,000 and was sold during the year for Rs 4,500. Barring the transaction relating to this item, the gross profit earned during the year was 20 percent on sales.


Statement of inventory in trade as on 31st march, 2011

Inventory as on 31st March, 201014,250  
Less : Book value of abnormal inventory
(Rs 5,000 - Rs 1,750)
Add : Purchases 76,250
Manufacturing Expenses 15,000
Less : Cost of goods sold :  
Sales as per books1,24,500 
Less :  Sales of abnormal item4,500 
Less :  Gross Profit @ 20%24,00096,000
Inventory in trade as on 31st March, 2011 6,250

illustration 7

A trader prepared his accounts on 31st March, each year. Due to some unavoidable reasons, no inventory taking could be possible till 15th April, 2011 on which date the total cost of goods in his godown came to Rs 50,000. The following facts were established between 31st March and 15th April, 2011.

(i) Sales Rs 41,000 (including cash sales Rs 10,000)
(ii) Purchases Rs 5,034 (including cash purchases Rs 1,990)
(iii) Sales Return Rs 1,000.
Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of inventory as on 31st March, 2011.


Statement of valuation of inventory on 31st march, 2011

Value of Inventory as on 15th April, 2011 50,000
Add : Cost of goods sold during the period from  
31st March, 2011 to 15th April, 2011 
Sales (Rs 41,000 - Rs 1,000)40,000 
Less : Gross Profit (20% of Rs 40,000)8,00032,000

Less : Purchases during the period from  
31st March, 2011 to 15th April, 2011

illustration 8

Inventory taking for the year ended 30th September, 2011 was completed by 10th October 2011, the valuation of which showed a inventory figure of Rs1,67,500 at cost as on the completion date. After the end of the accounting year and till the date of completion of inventory taking, sales for the next year were made for Rs6,875, profit margin being 33.33 percent on cost. Purchases for the next year included in the inventory amounted to Rs9,000 at cost less trade discount 10 percent. During this period, goods were added to inventory at the mark up price of Rs300 in respect of sales returns. After inventory taking it was found that there were certain very old slow moving items costing Rs1,125, which should be taken at Rs525 to ensure disposal to an interested customer. Due to heavy flood, certain goods costing Rs1,550 were received from the supplier beyond the delivery date of customer. As a result, the customer refused to take delivery and net realisable value of the goods was estimated to be Rs1,250 on 30th September. Compute the value of inventory for inclusion in the final accounts for the year ended 30th September, 2011.


Statement showing the valuation of inventory as on 30th September, 2011

Value of Inventory as on 10th October1,67,500
Add: Cost of goods sold after 30th September till Inventory taking (Rs6,875 - Rs 1,719)5,156
Less: Purchases for the next period (net)(8,100)
Less: Cost of Sales Returns(225)
Less: Loss on revaluation of slow moving inventories(600)
Less: Reduction in value on account of default(300)
Value of Inventory on September 301,63,431

illustration 9

The following are the details of a spare part of Sriram mills:

1-1-2011Opening InventoryNil
1-1-2011Purchases100 units @ Rs 30 per unit 
15-1-2011Issued for consumption50 units
1-2-2011Purchases200 units @ Rs 40 per unit 
15-2-2011Issued for consumption100 units 
20-2-2011Issued for consumption 100 units 

Find out the value of Inventory as on 31-3-2011 if the company follows First in first out basis. 

  RsRs RsRs RsRs
1-1-2011Balance      Nil 
1-1-2011100303,000   100303,000
15-1-2011   50301,50050301,500
1-2-2011200408,000   50301,500
15-2-2011   50301,500   

Therefore, the value of Inventory as on 31-3-2011: 50 units @ Rs 40 = Rs 2,000

illustration 10

The following are the details of a spare part of Sriram mills:


Opening Inventory





100 units @ Rs 30 per unit


Issued for consumption

50 units




200 units @ Rs 40 per unit


Issued for consumption

100 units



Issued for consumption

100 units


Find out the value of Inventory as on 31-3-2011 if the company follows Weighted Average basis.


Weighted average basis

Sriram mills

Calculation of the value of inventory as on 31-3-2011

DateUnitsRate AmountUnitsRateAmountUnitsRate amount
  RsRs RsRs RsRs
1-1-2011Balance      Nil 
1-1-2011100303,000   100303,000
15-1-2011   50301,50050301,500
1-2-2011200408,000   250389,500
15-2-2011   100383,800150385,700
20-2-2011   100383,80050381,900

Therefore, the value of Inventory as on 31-3-2011 = 50 units @ Rs 38 =  Rs1,900 

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