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Overview of Nominal Accounts in a Perpetual Inventory System

written by: Ivana Banks•edited by: Jean Scheid•updated: 11/30/2010

Are you looking for a inventory system that will allow you to keep accurate records? If so, try the nominal accounts in perpetual inventory system.

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    Businesses across the country must implement concrete methods to controlling their inventory on a daily basis. The nominal accounts in a perpetual inventory system is one of the methods used to revise inventory totals as additions and deductions are continually created. Here, we'll explain how this system works, and how it is used in the business world.

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    What Are Nominal Accounts in a Perpetual Inventory System?

    Porcelain Vessels Before we explain the perpetual inventory system, let's take a little time to discuss what nominal accounts are. In accounting, nominal accounts are temporary accounts used to record gains, losses, revenues, and expenses. These accounts are used on the Income Statement and are closed out at the end of each accounting period. Once the nominal or temporary accounts are closed, they are transferred over to permanent accounts. The total balance is then included in the owner's equity account for a sole proprietorship, or retained earnings account for a corporation. Subsequently, the nominal accounts are now at a zero balance and can be used again for the next period.

    Now that you understand the nominal accounts concept, we can now move on to what a perpetual inventory system is. A perpetual inventory system is designed to provide an entity with the most accurate and up-to-date information regarding additions and deductions to their inventory. That means the system is consistently adjusted as transactions occur, usually when goods are either received or shipped out. This inventory system is more timely and is opposite to the system where inventory is sustained monthly or quarterly. Which brings us into the next section, the periodic inventory system.

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    Perpetual Inventory vs. Periodic Inventory

    Colorful Bottles As just explained above, the perpetual inventory system gives more accurate data as inventory is maintained on a frequent basis. Consequently, the periodic system only adjusts information monthly or quarterly, and is not as timely or accurate regarding everyday inventory levels.

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    Examples of a Perpetual Inventory System

    Iron Wire Below are examples of nominal accounts in a perpetual inventory system. In order to show you how it is unique, we must compare it to periodic inventory systems. So, below you will find examples of both the perpetual system and the periodic:

    On April 1, 2010, ABC Company purchased merchandise in the amount of 1,000 units at $20 per unit.

    4/1/2010: Method - Perpetual Inventory system:

    • Debit: Inventory $20,000
    • Credit: Accounts payable $20,000

    4/1/2010: Method - Periodic inventory system:

    • Debit: Inventory Purchases $20,000
    • Credit: Accounts payable $20,000

    Inventory purchases occurring during the accounting period are recorded in the "Inventory Purchases" asset account, when using the periodic inventory method.

    On April 10, 2010, ABC Company sold 100 units of inventory at $50 per unit, which was sold on credit.

    4/10/2010: Method - Perpetual inventory system:

    • Debit: Accounts Receivable $5,000
    • Credit: Sales $5,000
    • Debit: Cost of goods sold $2,000
    • Credit: Inventory $2,000

    Any changes occurring in the inventory account are recorded after each transaction is made, under the perpetual inventory system. .

    On the other hand, whien using the periodic inventory system, transactions are recorded at the end of the accounting period. Therefore, the following entries are recorded:

    4/30/2010: Method - Periodic inventory system:

    • Debit: Accounts Receivable $5,000
    • Credit: Sales $5,000

    4/30/2010 Accounting Balance:

    • Debit: Inventory $18,000
    • Credit: Inventory Purchases $18,000

    Inventory Balances:

    Equals: 1,000 units bought - 100 units sold = 900 units remaining

    Cost of Inventory:

    Equals: 900 units x $20 per unit = $18,000

    4/30/2010 Accounting Entries:

    • Debit: Cost of goods sold (COGS) $2,000
    • Credit: Purchases $2,000


    • Equals: Total purchases - Ending balance of inventory
    • Equals: 1,000 units x $20 per unit - 900 units x $20 per unit
    • Equals: $20,000 - $18,000 = $2,000

    Ending Inventory and COGS:

    Ending inventory:

    • Equals: Beginning inventory + Total Purchases - COGS
    • Equals: $0 + $20,000 - $2,000 = $18,000


    • Equals: Beginning inventory + Total Purchases - Ending inventory
    • Equals: $0 + $20,000 - $18,000 = $2,000
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    As you can see, nominal accounts in a perpetual inventory provides a simplistic and accurate approach to inventory control. This system allows up-to-date control over inventory measures so that companies can maintain consistent and adequate inventory levels.


    1. Accounting Info -
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