Periodic Inventory System Journal Entries

Firstly, we are interested to know “what is Periodic Inventory System”. Basically, it is a system in which value of inventory are not updated daily rather than it is recorded at the end of Accounting Period.

You may also be interested in Perpetual Inventory System Journal Entries.

We record Following Business Transactions related to Under Periodic Inventory System:

Purchase of Merchandise

Suppose an Entrepreneur purchases 10 pieces of clothes on Credit from his / her supplier or Accounts Payable during the current accounting period 2016. The rate of these clothes are Rs.1000. We record the following Journal Entry at the end of Accounting Period:

Purchases a/c 10000

                 Accounts Payable a/c 10000

Purchased 10 Pieces of Clothes at the rate of Rs.1000 From Accounts Payable

Sales of Merchandise

Now the entrepreneur sold on credit, the 5 pieces of clothes at the rate of Rs.2000 to his / her customers or Accounts Receivable, then the following Journal Entry is made:

Accounts Receivable a/c 10000

                                   Sales a/c 10000

Sold 5 Pieces of Clothes to Customers on credit at the end of accounting period at the rate of Rs.2000

How To Calculate Cost of Goods Sold Under Periodic Inventory System

Now as we are using period Inventory system, so According to The Matching Concept which is one of the Principles of Generally Accepted Accounting Principles (GAAP), we adjust the value of cost of goods sold and closing value inventory at the end of accounting period. For this purpose, we use the following Cost of Goods Sold Formula:

Opening Inventory + Purchases - Closing Inventory = Cost of Goods Sold

Cost Of Goods Sold Journal Entries Under Periodic Inventory System

Suppose we have opening inventory from the previous accounting period = Rs.4000, Purchases = Rs.10000 and closing Inventory which includes those 5 Pieces of cloths that are remained to be sold at the end of accounting period are recorded for per unit price of Rs.1000 = Rs.5000, then cost of cloths sales is:

Cost of Goods Sold For Cloths = 4000 + 10000 - 5000 = 9000

At the end of Operating Cycle or Accounting Period, following Journal Entries are passed to adjust the balance of Cost of Goods Sold and to find the balance of closing inventory

Cost of Goods Sold a/c 140000

                                 Beginning Inventory a/c 40000

                                 Purchases a/c                   10000

Beginning Inventory and Purchases are closed in order to calculate the cost of goods sold.

As, we know, there are possibilities that all goods (Clothes) are not sold at the end of the accounting period, so by physical counting of inventory, we find that 5 Pieces of Clothes ( at the rate of Rs.1000) are remained unsold. So we pass the following Inventory Journal Entry to adjust the balance of cost of sales and to find the balance of closing inventory that are remained unsold at the end of Accounting Period.

Inventory a/c 5000

                Cost of Goods Sold a/c 5000

So, in periodic Inventory System, we are interested in recording the value of inventory at the end of Accounting Period.