## **Learning Outcomes**

After reading this article, you will be able to explain why businesses keep inventory records, identify the main documents that support inventory movements, and distinguish between perpetual and periodic inventory record systems. You will also be able to update basic perpetual quantity records and calculate cost of sales and closing inventory under a periodic system. Finally, you will know why physical inventory counts are still required and how differences (losses or errors) are handled.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must understand:

- the purpose and content of key business documents that support purchases, sales, deliveries and returns
- the sources of accounting data and how records meet business requirements, including non-ledger (memorandum) records
- how computerised systems process transactions in real time or in batches and produce management reports (eg inventory reports)
- why document retention policies are needed, including keeping records of year-end inventory counts
- how checks and authorisation help reduce errors and fraud in routine transaction processing

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which statement best describes a **periodic** inventory system?
   - A. Inventory quantities are updated after every receipt and issue
   - B. Inventory is counted at the end of the period and cost of sales is calculated using a formula
   - C. Inventory is never counted because records are always correct
   - D. Inventory is recorded only when suppliers are paid

2. True or false? In a perpetual inventory system, a physical inventory count is unnecessary.

3. State two internal documents that can provide evidence for updating inventory records when goods are received and when goods are issued.

4. Under a periodic system, cost of sales is usually calculated as:
   - A. Closing inventory + Purchases − Opening inventory
   - B. Opening inventory + Purchases − Closing inventory
   - C. Purchases − Closing inventory
   - D. Sales − Closing inventory

## **Introduction**

Inventory is often a major asset for businesses that buy and sell goods. If inventory records are wrong, a business may run out of items to sell, over-order, or report the wrong profit.

For FA1, you need to link inventory movements to the documents that prove what happened (for example, goods received notes and delivery notes). You also need to understand two common approaches to inventory record keeping: **perpetual** records (updated continuously) and **periodic** records (updated mainly at the period end).

## **Inventory records: what they are used for**

Inventory record keeping has two linked aims: (1) to show what is on hand and where it is, and (2) to support reliable figures for reporting (especially cost of sales and closing inventory).

Some inventory information is held outside the double-entry ledger as internal reports. Even where it is not part of double entry, it is still expected to agree with source documents and be checked regularly.

> **Key Term: inventory**
> Goods held for resale, or materials and items held for use in making goods for sale.
>
> **Key Term: inventory usage report**
> A report (often produced by a computer system) summarising inventory receipts, issues and balances for monitoring and re-ordering.

### General ledger entries vs inventory records

In many businesses, purchase and sales transactions update the general ledger (eg purchases, sales, receivables, payables, sales tax). Inventory quantities may be updated at the same time, but the quantity record itself is often treated as an internal record used for ordering, checking and day-to-day operations.

For exam purposes, keep the link clear: **no update should be made without a document trail**.

## **Documentation that supports inventory movements**

Inventory records are only as good as the documents behind them. The main checks are that goods were ordered, received/despatched, and invoiced correctly.

### Evidence for goods coming into the business (purchases and returns in)

Common documents include:

- purchase order (what was requested)
- delivery note from the supplier (what they say they delivered)
- goods received note (what you actually received and accepted)
- supplier invoice (what you are asked to pay)
- supplier credit note (reduces what you owe, often for returns, shortages or damaged goods)

> **Key Term: goods received note (GRN)**
> An internal document prepared when goods arrive, confirming quantities received (and often condition), used to check supplier invoices.

### Evidence for goods going out (sales, returns out, internal issues)

Common documents include:

- sales order (what the customer requested)
- delivery note/despatch note (what was sent)
- sales invoice (what the customer is charged)
- sales credit note (reduces what the customer owes, often for returns)
- internal issue paperwork for inventory taken from stores (for example, to production)

> **Key Term: goods issue note (stores requisition)**
> An internal document authorising and recording inventory issued from stores (eg to production or another department).

### Document retention and referencing

Businesses normally keep transaction documents for several years to deal with queries, support tax reporting, and support financial statements. Inventory count records at the period end are also kept because they support the closing inventory figure.

Documents are often numbered and coded (supplier codes, customer codes, product/item codes). This helps you trace from a stock record entry back to the evidence.

## **Perpetual inventory records**

A perpetual system keeps inventory records up to date as transactions happen (or very soon after). Each receipt and issue updates the inventory record, giving a running balance.

> **Key Term: perpetual inventory system**
> An inventory record system where quantities (and often values) are updated continuously for each receipt and each issue of inventory.

### What records are used?

A perpetual system usually relies on an item-by-item record, such as a stock card (manual) or an item record in accounting software.

> **Key Term: stock card (bin card)**
> A record for a single inventory item showing quantities received, quantities issued and the running balance.

### How updates happen in practice

A simple quantity-based approach is:

- **Goods received:** update the stock card using the GRN (and related delivery note)
- **Goods issued/despatched:** update the stock card using a goods issue note and/or delivery note

In a computerised system, recording a purchase invoice and recording a sales invoice may also update inventory records automatically. This makes timely processing and accurate coding (item codes, quantities, units) very important.

### **Worked Example 1.1**

A business keeps a perpetual **quantity** record for Product X.

- Opening balance: 120 units
- GRN 1049 received: 45 units
- Delivery note 7782 despatched: 70 units

What closing balance should the stock card show, and which documents support the two movements?

> **Answer:**
>
> $$
> \text{Closing balance} = 120 + 45 - 70 = 95 \text{ units}
> $$
>
> The receipt is supported by the **GRN** (and supplier delivery note).  
> The issue/despatch is supported by the **delivery note** (and, where relevant, a goods issue note/stores requisition).

### Benefits and limitations (exam-focused)

Benefits:

- stock levels are available during the period for ordering and checking
- losses and errors may be noticed earlier

Limitations:

- records can still be wrong if documents are missing, processed late, or entered incorrectly
- a physical count is still needed to confirm what is really on hand

### **Exam Warning**

A perpetual system does **not** mean “no stock count”. It means records are updated continuously, but you still need physical checks to confirm the records.

## **Periodic inventory records**

A periodic system does not maintain a continuously updated inventory figure. The business counts inventory at the period end and uses that count to calculate cost of sales.

> **Key Term: periodic inventory system**
> An inventory record system where inventory is measured mainly at the period end (usually by physical count) and cost of sales is calculated using opening inventory, purchases and closing inventory.

### How cost of sales is calculated

Under a periodic approach, cost of sales is commonly calculated as:

$$
\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Closing inventory}
$$

“Purchases” should be the net amount relevant to goods for resale (often purchases less returns).

### **Worked Example 1.2**

A business uses a periodic system. At the year end:

- Opening inventory: $£18,400$
- Purchases: $£96,000$
- Purchase returns: $£3,500$
- Closing inventory (from the count): $£21,600$

Calculate net purchases and cost of sales.

> **Answer:**
>
> $$
> \text{Net purchases} = 96,000 - 3,500 = £92,500
> $$
>
> $$
> \text{Cost of sales} = 18,400 + 92,500 - 21,600 = £89,300
> $$

### When a periodic system is seen

A periodic system is more likely where:

- items are low value and high volume
- it is not cost-effective to update stock records item by item
- management accepts that stock information is mainly needed at the period end

### **Revision Tip**

Memorise the periodic cost of sales formula and practise rearranging it. For example, if cost of sales is given, you may be asked to find closing inventory.

## **Physical inventory counts and differences**

A physical count is the process of counting the actual inventory held. It supports the closing inventory figure and checks the reliability of records.

> **Key Term: physical inventory count**
> A count of actual inventory on hand at a specific date, used to confirm inventory records and provide a basis for closing inventory.

If the physical count does not match recorded quantities, the difference must be investigated. Typical causes include input errors, timing cut-off errors, damage, theft, or unrecorded movements.

> **Key Term: shrinkage**
> Unexplained loss of inventory (for example through theft, damage, wastage or record errors) shown by a shortfall between records and a physical count.

## **Perpetual vs periodic records: a quick comparison**

| Feature                             | Perpetual records                           | Periodic records                                   |
| ----------------------------------- | ------------------------------------------- | -------------------------------------------------- |
| Inventory balance during the period | Available from records                      | Usually unknown until count                        |
| Updates                             | After each receipt/issue                    | Mainly at period end                               |
| Main supporting documents           | GRNs, issue notes, delivery notes, invoices | Same documents, but stock figure mainly from count |
| Cost of sales                       | Can be updated regularly (system dependent) | Calculated using a period-end formula              |
| Need for physical counts            | Yes (to confirm records)                    | Yes (to measure closing inventory)                 |

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- inventory movements must be supported by a clear document trail
- perpetual systems update inventory records continuously using receipt and issue documents
- periodic systems measure inventory mainly at period end and calculate cost of sales using a formula
- stock cards (or system item records) show receipts, issues and running balances in a perpetual system
- a goods received note supports recording goods received and checking supplier invoices
- goods issue notes and delivery notes support recording goods issued/despatched
- physical inventory counts are needed under both systems
- shrinkage and other differences must be investigated and recorded appropriately

## **Key Terms and Concepts**

- inventory
- inventory usage report
- goods received note (GRN)
- goods issue note (stores requisition)
- perpetual inventory system
- stock card (bin card)
- periodic inventory system
- physical inventory count
- shrinkage


Inventory records and documentation - Perpetual vs periodic records