Under the periodic inventory system a company determines its inventory value based on an estimated or actual physical count of goods multiplied by the unit costs of the items. As a result, the costs of the goods purchased by the company will be debited to the temporary account Purchases. Under the periodic inventory system, there will also be temporary accounts that will be credited for Purchase Returns and Allowances and for Purchase Discounts.
If a company wants its Inventory account to have a running dollar amount, it will use the perpetual inventory system. Under the perpetual inventory system, the costs of the goods purchased are debited to Inventory. The perpetual system also requires that the Inventory account be credited for the cost of the goods sold, for purchase returns and allowances, and for purchase discounts.
