What is Periodic Inventory System? Accounting Treatment of Periodic Inventory System.

General concept of Periodic Inventory System

Periodic Inventory system is the system where inventory account is not updated for each purchase and each sale.

All purchases are debited to purchase account instead of Mechandise Inventory Account. At the end of accounting period, the total purchase mentioned in the purchase account is added to the beginning balance of the inventory to compute the Cost of Goods Sold (COGS). The ending inventory is determined by a physical count and subtracted from the cost of goods sold.

Formula of Cost of Goods Sold (COGS):

Cost of Goods Sold (COGS) = Beginning Inventory + Purchase – Closing Inventory.

Accounting Treatment of Periodic Inventory

Serial No.	Particulars of Transactions	Journal Entries	Remarks
1.00	When Goods are procured	Purchase Account…… Debit Accounts Payable A/c…… Credit	* In Perpetual inventory system Merchandise Inventory A/c is Debited instead of Purchase A/c
2.00	When expenses incurred to obtain goods for sale	Expenses A/c (Such as Freight, Insurance) ……..Debit Cash/Bank A/c….Credit	* In Perpetual Inventory System Merchandise Inventory A/c is debited instead of Expenses A/c.
3.00	When Goods return to the supplier	Accounts Payable ….. Debit Purchase Return and allowances ……Credit	* In Perpetual Inventory System Merchandise Inventory is credited instead of Purchase Return Account.
4.00	When Payment is made	Accounts Payable A/c …..Debit Cash/Bank A/c ….. Credit
5.00	When goods are sold to customers	Accounts Receivable ….. Debit Sales A/c …. Credit
6.00	When Goods are returned by Customers	Sales Return ….Debit Accounts Receivable … Credit
7.00	When Cash is Collected from Customers	Cash/Bank A/c …. Debit Accounts Receivable …. Credit
8.00	At the end of accounting period	Ending Inventory …. Debit Cost of Goods Sold …Debit* Purchase A/c ……Credit Beginning Inventory A/c…Credit	* Cost of Goods Sold = Beginning Inventory + Purchase – Ending Inventory

Example of Periodic Inventory System

Problem: Information belongs to Pacific Hardware Store are as follows:

Beginning Inventory 3,000 units @ $10

Purchase made during the period 3,800 units @ $10

Sales during the year 4,800 units @ $20

Ending Inventory

Requirement: Make Journal Entries for above transaction, using Periodic Inventory System

Solution:

Purchase A/c …………………..Debit Accounts Payable A/c ………… Credit	38,000 38,000
Accounts Receivable A/c ………… Debit Sales A/c…………………………………Credit	96,000 96,000
Ending Inventory (by Physical Count)……..Debit Cost of Goods Sold (Balancing Amount)………..Debit Purchase A/c……………………………………………….Credit Beginning Inventory……………………………………..Credit	20,000 48,000 30,000 38,000

** Cost of Goods Sold = Beginning Inventory + Purchase A/c – Closing Inventory = $30,000+38,000 – 20,000 = $48,000

Benefits of Periodic Inventory System

• Less Expensive: This is less expensive because no permanent employee is required for physical counting of merchandise inventory.
• Simple Method: Both large and small organization use this method because of its simplicity.
• Business Activities not hamper: Stock-taking is done at the end of a period, hence normal activities of the business are not hampered.
• Reliability: Since stock taking is done on a particular date the quantity of stock merchandise is reliable.

Limitations of Periodic Inventory System

• Stope of Normal work: Normal Work to be Stopped during inventory counting period. On the day of physical counting of inventory, normal activities of business remain almost suspended.
• Inventory result may not Appropriate: Counting may be completed within a limited time period, that may cause of producing inappropriate inventory balance
• Week System: Under this system, the stock control device is very weak and the employee takes a chance to adopt corruption.