Chapter8: Inventories: Measurement
Periodic Inventory System
A periodic inventory system the merchandise inventory account balance is not adjusted as purchases and sales are made but only periodically at the end of a reporting period when a physical count of the period's ending inventory is made and costs are assigned to the quantities determined. is not designed to track either the quantity or cost of merchandise. The merchandise inventory account balance is not adjusted as purchases and sales are made but only periodically at the end of a reporting period. A physical count of the period's ending inventory is made and costs are assigned to the quantities determined. Merchandise purchases, purchase returns, purchase discounts, and freight-in (purchases plus freight-in less returns and discounts equals net purchases) are recorded in temporary accounts and the period's cost of goods sold is determined at the end of the period by combining the temporary accounts with the inventory account:
A periodic inventory system adjusts inventory and records cost of goods sold only at the end of each reporting period.
Cost of goods sold equation
The cost of goods sold equation assumes that all inventory quantities not on hand at the end of the period were sold. This may not be the case if inventory items were either damaged or stolen. If damaged and stolen inventory are identified, they must be removed from beginning inventory or purchases before calculating cost of goods sold and then classified as a separate expense item.
Illustration 8-2 looks at the periodic system using the Lothridge Wholesale Beverage Company example.
Periodic Inventory System
The Lothridge Wholesale Beverage Company purchases soft drinks from producers and then sells them to retailers. The company began 2011 with merchandise inventory of $120,000 on hand. During 2011 additional merchandise was purchased on account at a cost of $600,000. Sales for the year, all on account, totaled $820,000. Lothridge uses a periodic inventory system. A physical count determined the cost of inventory at the end of the year to be $180,000.
The following journal entries summarize the inventory transactions for 2011. Of course, each individual transaction would actually be recorded as incurred:
Because cost of goods sold isn't determined automatically and continually by the periodic system, it must be determined indirectly after a physical inventory count. Cost of goods sold for 2011 is determined as follows:
The following journal entry combines the components of cost of goods sold into a single expense account and updates the balance in the inventory account:
This entry adjusts the inventory account to the correct period-end amount, closes the temporary purchases account, and records the residual as cost of goods sold. Now let's compare the two inventory accounting systems.