Recently, CBU installed a new computer system for tracking inventory costs. However, at year end, there was a discrepancy between what the system reported and what the independent auditor reported after a physical count. There was a difference of $1.0 million dollars which need to be accounted for. Therefore, the CBU’s accounting staff processed an adjusting entry to reduce inventory by the difference.
Accountant Philosophy The two accountants are debating over two different types of accounting practices known as the periodic and perpetual inventory systems. The periodic inventory system keeps the inventory balance at the same value that it was at the beginning of year. Then at year end, a physical count is needed to adjust the inventory balance. The use of purchase accounts are closed out to justified amount of merchandise purchased. Whereas, the perpetual inventory system records cost of goods sold and keeps inventory at its current balance throughout the year. Therefore, there is no need to do a year end adjustment because inventory is constantly being updated when product is purchased.
Diverse Opinions
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Accountant A was more concerned with the financial statements being fairly represented. Given that CBU followed procedures by conducted a physical count of inventory, Accountant A’s philosophy was correct since CBU’s inventory system was a periodic system. Chirantan Basu agrees by writing, “at-year end, a company does a physical inventory count, which requires adjusting entries to the inventory account in the current assets section of its balance sheet.” This adjusting entry will reflect the year end numbers thus Accountant A followed good internal control procedures by having a regular physical inventory count to safeguard a valuable enterprise