The periodic inventory system does not maintain continuous records of inventory or cost of goods sold. Instead, these amounts are determined periodically, usually at year-end, through a physical count and computation. Page 9 introduces it as an alternative to perpetual systems, used primarily by small businesses with manual accounting.
Ideal for firms where real-time tracking isn’t critical, the periodic system minimizes recordkeeping effort. Page 10 uses Wagner Office Products as an example, illustrating its simplicity for businesses with limited resources.
Purchases are recorded in a Purchases account, not Inventory, throughout the period. On January 6, Wagner Office Products purchased $2,000 of merchandise from Ink Jet Solutions (terms n/30):
Journal Entry:
Debit Purchases $2,000
Credit Accounts Payable $2,000
This accumulates costs in Purchases, leaving the Inventory account unchanged until year-end (e.g., stuck at $14,000 from 2020).
Sales are recorded for revenue only, without adjusting inventory or cost of goods sold. No example is provided, but Page 10 notes this omission, deferring cost recognition to the period’s end.
The system’s cornerstone is a year-end physical count to determine ending inventory. For Wagner, 2021’s count showed $12,000 on hand, compared to $14,000 at the start, driving subsequent calculations.
Cost of goods sold is calculated using beginning inventory, purchases, and ending inventory:
Formula:
Beginning Inventory ($14,000) + Purchases ($130,000) = Cost of Goods Available ($144,000)
Less Ending Inventory ($12,000) = Cost of Goods Sold ($132,000)
Page 10 explains this $132,000 reflects purchases plus the $2,000 inventory decrease, adjusting for stock changes.
Ending inventory and cost of goods sold are recorded during closing entries. Page 11 details two steps for Wagner:
First Entry: Combine costs into Cost of Goods Sold:
Debit Cost of Goods Sold $144,000
Credit Inventory $14,000
Credit Purchases $130,000
Second Entry: Adjust for ending inventory:
Debit Inventory $12,000
Credit Cost of Goods Sold $12,000
This results in a $132,000 cost of goods sold and updates Inventory to $12,000, as shown in Exhibit 6-5 (Page 11).
Post-closing, the system resets for the next period, with Purchases cleared and Inventory reflecting the physical count, ready for new transactions.