Periodic Inventory Journal Entry
Periodic inventory is the inventory control system that does not keep track of the inventory balance and cost of goods during the month. It will update the final balance at the month-end only.
Inventory is the main key asset that remains on the company balance sheet. It is the resource that is available for sale for the trading company. For the manufacturer, it refers to the raw material, work in progress, and finished products as well. Inventory is the assets that a company will sell to generate revenue for the business. It is the main source of income for the company.
There are two systems that we can use to manage the inventory, periodic and perpetual. The periodic inventory system will record the purchase inventory into the purchase account. It is the temporary account that will be reversed to zero on the reporting date. Some companies put it under the inventory sub-account, however, we can put it in any account as it is just a temporary account.
Moreover, the periodic system will not record any cost of goods sold during the month. When inventory is sold, they only record sales revenue and accounts receivable. Cost of goods sold is only recorded at the month-end as the total amount.
So during the month, we do not know about the inventory balance and cost of goods sold at all. The inventory increase will not update, we only use the temporary account (purchase). The cost of goods sold will not be recorded as well, we only calculate it at the month-end.
At the month-end, company will perform an inventory physical count and record it into the financial statement. It is the balance that will be present on the balance sheet. The purchase account will be reversed to zero alongside with previous month’s balance. The cost of goods sold will be calculated and recorded in the income statement. These are the month-end closing journal entry.
Periodic Inventory Journal Entry
When the company purchases the inventory, they have to record it into the purchase account which is the inventory sub-account.
The journal entry is debiting the purchase account and credit accounts payable/cash.
Account | Debit | Credit |
---|---|---|
Purchase | $$$ | |
Accounts Payable / Cash | $$$ |
The transaction will increase the inventory balance as the purchase account is under the inventory account. If there are purchase returns and purchase discounts, the company has to reduce the purchase account. The journal entry is debiting accounts payable and credit purchase accounts.
Account | Debit | Credit |
---|---|---|
Accounts Payable | $$$ | |
Purchase Return/Discount | $$$ |
The transaction will reduce the purchase which is the inventory account and it will decrease the accounts payable as the supplier has agreed. The purchase discount and purchase return are the contra account of the inventory account. So when company records this transaction, it will reduce the inventory.
Sale of Inventory
Under the periodic inventory system, when company makes sales, they only record the revenue and accounts receivable/cash. The journal entry is debiting accounts receivable or cash and credit sales revenue.
Account | Debit | Credit |
---|---|---|
Accounts Receivable / Cash | $$$ | |
Sales Revenue | $$$ |
The transaction will increase the sale on income statement. It also increases the accounts receivable and cash based on the nature of the sale.
Similar to purchase returns and discounts, company has to record them into the accounting system. The record will impact the accounts receivable and net off with sale revenue. The journal entry is debiting sale discount/sale return and credit accounts receivable.
Account | Debit | Credit |
---|---|---|
Sales Return/Sale Discount | $$$ | |
Accounts Receivable | $$$ |
It will reduce the accounts receivable from balance sheet. Sales Return and Sales Discount is the contra account of sales revenue, so it simply reduces the sale amount from income statement.
COGS and Ending Inventory
Under the periodic system, the company does not record the cost of goods sold alongside the sale transaction. We need to calculate cost of goods sold at the end of the month and make the recording. The cost of goods sold will be calculated using the following formula:
COGS = Beginning Inventory + Purchases − Ending Inventory
The ending inventory depends on the physical count that company has to perform at the end of the month. After we receive the ending inventory balance and COGS, we have to record them in the financial statements. The journal entry is the following :
Account | Debit | Credit |
---|---|---|
Inventory (Ending) | $$$ | |
COGS | $$$ | |
Inventory (Begining) | $$$ | |
Purchase | $$$ |
The transaction will record inventory based on the month-end physical count. The COGS will be increased based on the calculation above. At the same time, we need to reverse last month’s inventory balance otherwise it will double count. The purchase account is also removed as it is the inventory sub-account.
Example
ABC is a trading company and they use a periodic inventory system. At the beginning of the month, the inventory balance was $ 20,000, and company has the following transaction:
- Purchase inventory cost $ 5,000 on credit
- Return low-quality material for $ 1,000
- Make some sales for $ 10,000 and discount for $ 500 to the customer
- The month-end physical count is $ 10,000
Please prepare journal entry for the periodic inventory system.
When the company purchase inventory, they have to record purchase and accounts payable.
Account | Debit | Credit |
---|---|---|
Purchase | 5,000 | |
Accounts Payable | 5,000 |
The purchase return will be recorded as following:
Account | Debit | Credit |
---|---|---|
Accounts Payable | 1,000 | |
Purchase Return | 1,000 |
When the company makes sale, they have to record accounts receivable, sales discount, and sale revenue. The journal entry is debiting accounts receivable $ 9,500, sales discount $ 500, and credit sales revenue $ 10,000.
Account | Debit | Credit |
---|---|---|
Accounts Receivable | 9,500 | |
Sales Discount | 500 | |
Sales Revenue | 10,000 |
The net sale will be recorded only $ 9,500 due to the discount while the accounts receivable increase only $ 9,500 too.
Next, ABC has to calculate the cost of goods sold.
COGS = Beginning Inventory + Purchases − Ending Inventory
= 20,000 + (5,000 – 1,000) – 10,000 = $ 14,000
The closing journal entry is the following:
Account | Debit | Credit |
---|---|---|
Inventory (Ending) | 10,000 | |
COGS | 14,000 | |
Inventory (Begining) | 20,000 | |
Purchase | 4,000 |