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)

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 300Purchase 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 3500Purchase Discounts (3500*2%) 70Bank (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 300Accounts Receivable

300To record credit given for returned

goods.

Sales Discounts

Cash 3430Sales Discounts 70

Accounts Receivable 3500To 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 325000Less: Purch. Returns & allow 10400

Purch discounts 6800 17200Net Purchases 307800Add: Freight in 12200Cost of goods purchased $32000

Cost of Goods on Hand

Must take a physical count of inventory

Total cost of goods on hand is the ending inventory

Cost of Goods Sold

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, 201035000

Purchases 325000Less: Purch. Returns & allow&disc. 17200Net Purchases 307800Add: Freight in 12200Cost of goods purchased

320000Cost of Goods avail. For sale

355000Inventory May 31, 2011 40000Cost of Goods Sold

$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 accountIncome Summary 35000

Merchandise Inventory 35000To close the beginning inventoryMerchandise Inventory 40000 Income Summary 40000To close the ending inventory

WorksheetSix months ending

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

8,952.00 8,952.00 -

7,500.00 7,500.00 -

Allowance for Bad Debts - 215.00 775.00 990.00

Inventory 22,154.00 22,154.00 19,877.00 19,877.00

2,900.00 1,400.00 1,500.00 -

4,800.00 200.00 4,600.00 -

18,650.00 18,650.00 -

Accum. Depreciation 1,800.00 800.00 2,600.00

18,700.00 18,700.00 -

Accum. Depreciation 5,500.00 1,200.00 6,700.00

1,000.00 1,000.00

22,150.00 22,150.00

GST Payable 3,214.00 3,214.00

GST Recoverable 2,155.00 2,155.00

PST Payable 3,996.00 3,996.00

41,997.00 41,997.00

22,559.00 22,559.00 -

119,877.00 119,877.00

Sales Returns and Allow. 2,687.00 2,687.00

Service Revenue 15,899.00 15,899.00

Purchases 48,966.00 48,966.00

Purchases R & A 4,502.00 4,502.00

Freight-in 1,209.00 1,209.00

310.00 310.00

6,500.00 6,500.00

1,350.00 1,350.00

680.00 680.00

18,000.00 18,000.00

2,415.00 2,415.00

29,663.00 29,663.00

220,150.00 220,150.00

Bad Debts Expense 775.00 775.00

Insurance Expense 200.00 200.00

Supplies Expense 1,400.00 1,400.00

800.00 800.00

1,200.00 1,200.00

4,375.00 4,375.00 138,309.00 160,155.00 104,493.00 82,647.00

21,846.00 - - 21,846.00

160,155.00 160,155.00 104,493.00 104,493.00

December 31, 2002

Supplies

Prepaid Insurance

Merch CompanyWorksheet

ADJUSTMENTS INCOME STATEMENT BALANCE SHEET

Accounts Receivable

Cash

ACCOUNTSTRIAL BALANCE

Furniture and Equipment

Automobile

Accounts Payable

Bank Loan

A. Merch, Capital

A. Merch, Drawings

Telephone Expense

Interest Expense

Rent Expense

Wages Expense

Sales

Bank Charges

Car Expense

Miscellaneous Expense

Dep,n Expense, F&E

Dep'n Expense, Auto

Net Income

OriginalNEW

Close all

Close all

RECAP

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