Q30RQ - Horngren'S Financial And Managerial Accounting

Question

Highlight the differences in the closing process when using the periodic inventory system rather than the perpetual inventory system.

Step-by-Step Solution

Answer

Answer

The perpetual inventory system records the adjusting entries, while the periodic inventory system does not require adjusting entries.  

Step 1: Meaning of Inventory System

An inventory system refers to the management system that tracks the inventories of business entities through different methods. It facilitates the businesses to manage their inventory levels to keep their operations efficient.

Step 2: Differences

In the perpetual inventory system, adjusting entries are passed at the end of accounting. In comparison, no adjusting entry is required under the periodic inventory system.

The periodic inventory system does not close the revenues and expenses accounts. In contrast, the perpetual inventory system closes the revenues and expenses accounts and posts them into the income summary account.