a Periodic Inventory System4 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 COGSPurchases
= 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/30Freight-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 country4 Journal Entry
June 27 Freight-In 150
Bank 150
-to record freight charges on purchasesPurchase Returns &
4 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 300
Purchase 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 3500
Purchase Discounts (3500*2%) 70
Bank (3500-70) 3430
To record payment of invoice #731 within
discount period.4 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 #7314 Sales Returns & Allowances
Sales Returns & Allowances 300
Accounts Receivable 300
To record credit given for returned goods.Sales Discounts
Cash 3430
Sales Discounts 70
Accounts Receivable 3500
To 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.4 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 sold4 Cost of goods purchased
Purchases 325000
Less: Purch. Returns & allow 10400
Purch discounts 6800 17200
Net Purchases 307800
Add: Freight in 12200
Cost of goods purchased $320004 Cost of Goods on Hand
= Must take a physical count of inventory
= Total cost of goods on hand is the
ending inventory4 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 soldInventory June 1, 2010 35000
Purchases 325000
Less: Purch. Returns & allow&disc. 17200
Net Purchases 307800
Add: Freight in 12200
Cost of goods purchased 320000
Cost of Goods avail. For sale 355000
Inventory May 31, 2011 40000
Cost of Goods Sold $3150004 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.€.42500+143000=185500-36400 =
149100 COGSQUINCEY MERCHANDISING
Income Statement
for the year ended December 31, 2004
Revenue
Sales
Sales retums and allowances
Net Sales
Cost of Goods Sold
This
section
only for
periodic
system
[Opening Inventory, January 1
Purchases
Purchase returns and allowances
Net Purchases
Freight In
Cost of Good Available
Less Ending Inventory, December 31
|__Cost of Sales
Gross Profit
Operating Expenses
Salaries
Property tax
Utilities
Advertising
Amortization
Total Operating Expenses
Net Income
$ = 672,000
6,900
39,200
450 200
42,800
407 400
$665,100
36 900 444 300
483,500
42,300
55,000
21,900
11,500
10,700
8,200
441 200
223,900
106 400,
$117 500Closing Entries
= Two journal entries to close Merchandise
Inventory account
Income Summary 35000
Merchandise Inventory 35000
To close the beginning inventory
Merchandise Inventory 40000
Income Summary 40000
To close the ending inventoryWorksheet
Close all 2a
saws z Close all4 RECAP Ea
= 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 periodNew_accounts
Narre i
2.
3.
4
5
6.
7
8
9
Sales (not Fees Earned)
Sales Discounts (contra)
Sales Returns and Allowances (contra)
Purchases
Purchase Discounts (contra)
Purchase Returns and Allowances (contra)
Freight-in
. Freight-out (delivery expense)
Revenue
Contra-Revenue
Contra-Revenue
Cost of Goods Sold (expense)
Contra-Cost of Goods Sold (contra-
expense) =
Contra-Cost of Goods Sold (contra-
expense)
Cost of Goods Sold (expense)
Operating Expense