Perpetual and Periodic Inventory

The perpetual inventory method involves the continual updating of an entity's inventory
records to account for additions to and subtractions from inventory for such activities as
received inventory items, goods sold from stock, returned goods, and items picked from
inventory for use in the production process.

On the Other hand, the periodic method involves compiling all purchases during an
accounting period, conducting a physical inventory count at the end of the period, and
then using the following calculation to arrive at the cost of goods sold for a period:

Beginning inventory + Purchases - Ending inventory

A periodic inventory system relies upon having an accurate inventory count only when a
physical count is taken. At all other times, a company using the periodic system does not
know the exact number of units that it has in stock, which makes it inferior to the
perpetual inventory method.

LIFO, FIFO, Weighted Average.

The First-In-First-Out Method (FIFO)

This method assumes that the first inventories bought are the first ones to be sold, and
that inventories bought later are sold later. It is very common to use the FIFO method if
one trades in foodstuffs and other goods that have a limited shelf life, because the oldest
goods need to be sold before they pass their sell-by date. Thus the first-in-first-out
method is probably the most commonly used method in small business.

The Last-In-First-Out Method (LIFO)

This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last. The LIFO method is commonly used in the U.S.A.

The Weighted Average Cost Method

This method assumes that we sell all our inventories simultaneously. The weighted
average cost method is most commonly used in manufacturing businesses where
inventories are piled or mixed together and cannot be differentiated, such as chemicals,
oils, etc. Chemicals bought two months ago cannot be differentiated from those bought
yesterday, as they are all mixed together. So we work out an average cost for all
chemicals that we have in our possession. The method specifically involves working out
an average cost per unit at each point in time after a purchase.
Temporary and Permanent Accounts.

Businesses frequently maintain permanent and temporary accounts to keep accurate

records of their finances. Often they refer to permanent accounts as real accounts and
temporary accounts as nominal accounts. Both types are a record of financial activity.
Even in a small business, using temporary as well as permanent accounts can be
extremely helpful in managing your funds.

Purposes: Temporary accounts track funds during a particular fiscal period. These
accounts typically group finances into broad categories including "expenses" and
"revenues," which you can further divide into subcategories such as specific types of
inventory. Permanent accounts track funds over the course of many fiscal periods from
year to year. They track assets, liabilities and equity.

Suspense Accounts

A temporary account created to equal both sides of a trial balance in order to prepare
financial statement. It’s a temporary account and as such cause of difference in the sides
of a trial balance is found the account is closed.

Substance Over Form

Substance over form is an accounting concept where the entity is accounting for items
according to their substance and economic reality and not merely their legal form. This
concept is one of the key determinants of reliable information.

Substance over form usually applies to transactions which are fairly complicated. It is
very important because it acts as a 'catch-all' to stop entities distorting their results by
following the letter of the law, instead of showing what the entity has really been doing.

Opportunity Cost

Opportunity cost is the cost of not selecting the next best choice when investing resources
in an activity. Opportunity cost can be used to weigh the merits of various capital
investment opportunities.

Discretionary vs. Committed Fixed Costs

Fixed costs can be broken into discretionary and committed costs based on whether
managers can quickly eliminate a particular fixed cost in the short run.

Discretionary Fixed Costs: Managers can easily change discretionary fixed costs in the
short run by spending more or less on the particular cost item. In the short run, a business
will not be adversely affected if costs such as these are eliminated.

Examples:

- Advertising

- Research and development costs

- Repair and maintenance

Committed Fixed Costs: Managers are unable to easily change committed fixed costs in
the short run. For example, rent is a fixed cost that may be under requirements of a lease.
If there is no lease contract, what good would it do the company to curtail its total rent
cost? It would have no place to perform operations.

Examples:

- Rent

- Depreciation – buildings and equipment

- Insurance for buildings and equipment

Trial Balance and its limitations.

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the
first step towards the preparation of financial statements. It is usually prepared at the end
of an accounting period to assist in the drafting of financial statements. Ledger balances
are segregated into debit balances and credit balances. Asset and expense accounts appear
on the debit side of the trial balance whereas liabilities, capital and income accounts
appear on the credit side. If all accounting entries are recorded correctly and all the ledger
balances are accurately extracted, the total of all debit balances appearing in the trial
balance must equal to the sum of all credit balances.

The limitations of trial balance are:

 There are certain errors which are not disclosed by a trial balance. Again the
agreement of a trial balance is not a conclusive proof of the accuracy of posting.
 A trial balance gives only condensed information of each account.
 It does not give information about the profit or loss made by the business in the
accounting period or financial position of the business as at the close of the
period.