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 TransactionsJournal Entries Remarks
1.00When Goods are procuredPurchase Account…… Debit

Accounts Payable A/c…… Credit
* In Perpetual inventory system Merchandise Inventory A/c is
Debited instead of Purchase A/c
2.00When 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.
3.00When Goods return to the supplierAccounts Payable ….. Debit

Purchase Return and allowances ……Credit
* In Perpetual Inventory System Merchandise Inventory is credited instead of Purchase Return Account.
4.00When Payment is madeAccounts Payable A/c …..Debit

Cash/Bank A/c ….. Credit
5.00When goods are sold to customersAccounts Receivable ….. Debit

Sales A/c …. Credit
6.00When Goods are returned by CustomersSales Return ….Debit

Accounts Receivable … Credit
7.00When Cash is Collected from CustomersCash/Bank A/c …. Debit

Accounts Receivable …. Credit
8.00At the end of accounting periodEnding 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.