Periodic Inventory System
Periodic Inventory




Detailed inventory records of the goods on
hand are NOT kept throughout the period
Used for low-unit cost, high-volume turnover
goods
A physical inventory count is done to
determine the quantity and cost of goods on
hand at the end of the accounting period
The amount is deducted from the goods
available for sale to determine the COGS
Purchases

When merchandise is purchased, it is recorded in
the Purchases account at cost price, not in the
Inventory account (inventory is only updated at
the end of the fiscal period). This is an expense
account.
Purchases (at Cost Price) 3800
Bank or A/P
3800
To record the Purchase of Inventory invoice #731 terms 2/10,
n/30
Freight-in Account (Periodic)


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

Considered part of COG purchased
Used to accumulate any transportation charges on
incoming goods
Kept separate from transportation charges on
outgoing goods (recorded in Delivery Expense)
Usually placed right after Purchases account in
ledger
Duty – special charges imposed by the government
on certain goods imported from a foreign country
Journal Entry
June 27 Freight-In
150
Bank
150
-to record freight charges on purchases
Purchase Returns &
Allowances
Is a temporary account, normal balance is
a credit. It is a contra account whose
balance is deducted from the balance in
the Purchases account
Bank or A/P
300
Purchase Returns & Allowances 300
To record return of goods.

Purchase Discounts
Also a temporary account, normal balance is
Credit. It is a contra expense account
subtracted from the Purchases account to
calculate net purchases.
Accounts Payable 3500
Purchase Discounts (3500*2%)
70
Bank (3500-70)
3430
To record payment of invoice #731 within
discount period.

Sale of Merchandise
When merchandise is sold the transaction is
recorded at the selling price of the items.
Bank or A/R (at Selling Price) 3800
Sales (at Selling Price)
3800

To record the sale invoice #731
Sales Returns & Allowances
Sales Returns & Allowances 300
Accounts Receivable
300
To record credit given for returned goods.
Sales Discounts
Cash
3430
Sales Discounts
70
Accounts Receivable 3500
To record collection of invoice #731 within
discount period.
Note- sales entries are the same for both
system however there is an extra entry in
perpetual for sales returns to return merch.
back into inventory.
COGS
Three steps in a periodic system:
 Calculate cost of goods purchased
 Determine cost of goods on hand at the
beginning and end of the accounting period
 Calculate the cost of goods sold
Cost of goods purchased
Purchases
325000
Less: Purch. Returns & allow 10400
Purch discounts
6800 17200
Net Purchases
307800
Add: Freight in
12200
Cost of goods purchased
$32000
Cost of Goods on Hand
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
Must take a physical count of inventory
Total cost of goods on hand is the
ending inventory
Cost of Goods Sold
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
Add cost of goods purchased to cost of
goods on hand at the beginning of the
period = cost of goods available for sale
Subtract cost of goods on hand (ending
inventory) from cost of goods avail. For
sale = cost of goods sold
Inventory June 1, 2010
Purchases
325000
Less: Purch. Returns & allow&disc.
17200
Net Purchases
307800
Add: Freight in
12200
Cost of goods purchased
Cost of Goods avail. For sale
Inventory May 31, 2011
Cost of Goods Sold
35000
320000
355000
40000
$315000
RECAP COGS


Cost of beginning inventory + cost of
goods purchased = Cost of goods
available for sale – cost of ending
inventory = cost of goods sold
i.e.42500+143000=185500-36400 =
149100 COGS
This
section
only for
periodic
system
Closing Entries
Two journal entries to close Merchandise
Inventory account
Income Summary 35000
Merchandise Inventory
35000
To close the beginning inventory
Merchandise Inventory 40000
Income Summary
40000
To close the ending inventory

Worksheet
Merch Company
Worksheet
December 31, 2002
Six months ending
ACCOUNTS
TRIAL BALANCE
DEBIT
CREDIT
ADJUSTMENTS
DEBIT
CREDIT
INCOME STATEMENT
DEBIT
BALANCE SHEET
CREDIT
DEBIT
CREDIT
Cash
8,952.00
8,952.00
Accounts Receivable
7,500.00
7,500.00
Allowance for Bad Debts
Inventory
-
215.00
-
775.00
22,154.00
990.00
22,154.00
19,877.00
19,877.00
Supplies
2,900.00
1,400.00
1,500.00
-
Prepaid Insurance
4,800.00
200.00
4,600.00
-
Furniture and Equipment
18,650.00
Accum. Depreciation
Automobile
Accounts Payable
Bank Loan
GST Payable
1,000.00
22,150.00
3,214.00
2,155.00
Close all
3,996.00
41,997.00
22,559.00
119,877.00
2,687.00
2,687.00
15,899.00
15,899.00
48,966.00
48,966.00
4,502.00
4,502.00
1,209.00
310.00
310.00
Car Expense
6,500.00
6,500.00
Interest Expense
1,350.00
1,350.00
Rent Expense
Telephone Expense
Wages Expense
680.00
680.00
18,000.00
18,000.00
2,415.00
2,415.00
29,663.00
29,663.00
220,150.00
775.00
Insurance Expense
200.00
200.00
1,400.00
1,400.00
775.00
Dep,n Expense, F&E
800.00
800.00
Dep'n Expense, Auto
1,200.00
1,200.00
4,375.00
Net Income
Close all
220,150.00
Bad Debts Expense
Supplies Expense
-
119,877.00
1,209.00
Miscellaneous Expense
6,700.00
22,559.00
Purchases R & A
Bank Charges
18,700.00
1,000.00
3,996.00
Service Revenue
Freight-in
Original
2,600.00
22,150.00
41,997.00
Sales
Purchases
1,200.00
NEW
3,214.00
A. Merch, Capital
Sales Returns and Allow.
5,500.00
2,155.00
PST Payable
A. Merch, Drawings
800.00
18,700.00
Accum. Depreciation
GST Recoverable
1,800.00
18,650.00
4,375.00
138,309.00
21,846.00
160,155.00
160,155.00
160,155.00
104,493.00
104,493.00
82,647.00
21,846.00
104,493.00
RECAP
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Final inventory figure recorded on
balance sheets as Current Asset
Cost of Goods Sold recorded on income
statement
Neither inventory figure or COGS known
during accounting period
New accounts