Under periodic inventory system inventory account is not updated for each purchase and each sale. All purchases are debited to purchases account. At the end of the period, the total in purchases account is added to the beginning balance of the inventory to compute cost of goods available for sale. The ending inventory is then subtracted from the cost of goods available for sale to compute cost of goods sold. The ending inventory is computed at the end of the period by a physical count.
The general formula to compute cost of goods sold under periodic inventory system is given below:
Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory
Journal entries in a periodic inventory system:
(1). When goods are purchased from supplier:
(2) When expenses are incurred to obtain goods for sale – freight-in, insurance etc:
(3). When goods are returned to supplier:
(4). When payment is made to supplier:
(5). When goods are sold to customers:
(6). When goods are returned by customers:
(7). At the end of the period:
|Cost of goods sold (B.F)||xxxx|
The following information belongs to a hardware store.
|Inventory – 1st January 2012||200 units at $12||$2,400|
|Purchases during the years 2012||1800 units at $12||$21,600|
|Sales during the years 2012||1200 units at $24||$28,800|
|Inventory 31st December 2012||800 units at $12||$9,600|
Required: Make journal entries to record the above transactions using periodic inventory system.
|Inventory – ending||9,600|
|Cost of goods sold (B.F.)||14,400*|
|Inventory – beginning||2,400|
* [(21,600 + 2,400) - 9,600]
Periodic inventory system is usually used by companies that buy and sell a wide variety of inexpensive products.
A disadvantage of periodic inventory system is that overages and shortages of inventory is buried in cost of goods sold because no accounting record is available against which to compare physical count of inventory.