Periodic Inventory System

Periodic Inventory Systems

A periodic inventory system is an alternative to a perpetual inventory system. In a periodic inventory system no effort is made to keep up-to-date records of rather the inventory or the cost of goods sold. Instead, these amounts are determined only periodically – usually at the end of the each year.

Operation of a periodic inventory system

A traditional periodic inventory system operates as follows. When merchandise is purchased, its account is debited to an account entitled purchases, rather than to the inventory account. When merchandise is sold, an entry is made to recognize the sale revenue, but no entry is made to record the cost of goods sold or to reduce the balance of the inventory account. As the inventory records are not updated as transactions occur there is no inventory subsidiary ledger.

The foundation of periodic inventory system is the taking of the complete physical inventory at the end-year. This physical count determines the amount of inventory appearing in the balance sheet. The cost of goods sold for the entire year then is determined by a short computation.

Recording inventory and the cost of goods sold

A special occasion has now determined its inventory at the end of 2001 and its cost of goods sold for the year. But neither of these amounts has yet been recorded in the company’s accounting records.

In a periodic system, the ending inventory and the cost of goods sold are recorded during the company’s year-end closing procedures.

Closing process in a periodic inventory system

There are several different ways of recording the ending inventory and cost of goods sold in a periodic system, but they all produced the same results. One approach is to create a sold of goods sold account with the proper balance as part of the closing process. Once this account has been created, the company can complete its closing procedures is the same manner as if a perpetual inventory system had been in use.
Complete the closing process

Special occasions may now complete its closing process in the same manner as a company using a perpetual accounting system. The company will make the usual four closing entries, closing the (1) revenue accounts (2) expense accounts (including cost of goods sold) (3) income summary account, and (4) dividends account.

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