Q5-6RQ - Horngren'S Financial And Managerial Accounting

Question

What are the two types of inventory accounting systems? Briefly describe each.

Step-by-Step Solution

Answer

The two major types of inventory accounting systems are periodic and perpetual inventory systems. 

Meaning of Inventory Systems

In accounting, the process of tracking the inventories is termed inventory system or inventory management system. Such a system comprises the inventory tracking from purchasing the raw material to end sales.

Types of inventory accounting systems

The types of inventory accounting systems are as follows:

1. Periodic inventory system: As the name suggests, the periodic inventory system tracks the inventory of a business concern periodically. This inventory system generally updates the inventory accounts annually and ascertains the closing and opening balances of the merchandise. 
2. Perpetual inventory system: The perpetual inventory system records and maintains the inventory transactions simultaneously when they happen. In simple terms, this inventory system immediately records the variations in the inventory balances arising from the purchase and sale through computers.