Periodic Inventory - Purchasing Summary: Study with Video Lessons, Practice Problems & Examples

In a periodic inventory system, inventory balances accumulate throughout the period, with purchases, returns, discounts, and allowances tracked separately. At the end of the period, a physical inventory count determines the ending balance. The cost of goods sold (COGS) is calculated using the equation: $\mathrm{Beginning\; Inventory}+\mathrm{Purchases}-\mathrm{Purchase\; Discounts}-\mathrm{Purchase\; Returns}-\mathrm{COGS}=\mathrm{Ending\; Inventory}$. This process highlights the importance of accurate inventory management and financial reporting.

Periodic Inventory:Purchasing Summary

Alright, so now let's summarize everything we've learned about purchases in a periodic system. Let's put it all on one page now. So, throughout the period, we're going to see that these balances are going to be building up in all the inventory-related accounts, right? We have the purchases account that's going to be building balances for the purchases, purchase returns, purchase allowances, purchase discounts, right? There are all these accounts that are building up balances. Well, at the end of the period, remember in a periodic system, we're not making journal entries for cost goods sold as we go. We're going to figure out the cost of goods sold now at the end of the period. So, we're going to use that standard base equation. This is, we've used this before. This is where we start with the beginning balance. We're going to add stuff to it, subtract stuff from it, and then it gets to the ending balance. So, when we talk about inventory specifically, we're going to have an inventory beginning balance, then we're going to add the purchases to the inventory. We're going to subtract the purchase discounts, the purchase returns and allowances, and COGS. Right? COGS comes out of inventory as well, our cost of goods sold and then we'll have our ending balance in inventory. Okay? So, the difference here between perpetual and periodic, in a Perpetual system since we are making all the entries as we go, well we would know the ending balance in inventory, we would know the balance in COGS. In this case, we didn't keep track of COGS as we went. We're going to figure it out at this point. So, a key thing in the periodic system is a physical inventory count. Okay? So, in the periodic system at the end of the period, it's now let's say December 31st of the year, we're literally going to count all the inventory. We're going to go into the warehouse and we're going to count everything. How much you know of this product do we have? How much of this? And we're going to find a value of our ending inventory, okay? So, what I want you to know is that in this course, obviously when you get a problem on a piece of paper there's no way for you to count the inventory. So, this is always going to be given in these types of problems, they have to tell you something like the physical count at the end of the year showed that a balance of blah blah blah, right? They're going to have to tell you what that number is. Cool? So let's go ahead and see this example for a periodic inventory company where we're going to calculate COGS using all this information. Okay? I guess before we jump in there, I want to consider the idea well, no let's just go right in. I think this will be just fine. So, notice in this example, they give us an inventory for July 1st, that's our beginning balance for the month. They give us the inventory balance on July 31st, right? This is the ending balance and this would have come from some physical count, they would have counted everything and then said okay, this is the value that's left in our warehouse 48,000. Cool? And then during the month, we purchased 25,000 discounts blah blah blah and then it tells us some stuff about accounts payable here, but notice we don't need that information. Accounts payable is irrelevant to solving for COGS. To find COGS, it's going to be in the inventory account, okay? So let's see how this can work. Remember in a periodic system, all of these numbers, purchases, purchase discounts, they would have all been in separate accounts, but at the end of the day, we're going to put them all together into inventory to see how it affects inventory. Okay. So we would have had our inventory T account, Okay? And it would have had a beginning balance of 55,000. Right? That's what it told us on July 1st. That's our beginning balance. Right? And then what do we do? We purchase stuff during the month. Right? We purchase 25,000 worth of goods purchases, and then we're going to purchase discounts. 650 over here, 1500 for the returns and allowances. Those are also things that decrease. So these are purchase discounts and this was purchase returns. I'll just put returns. That's returns and allowances together there. Okay. So there's one more thing here. Right? There would be some COGS number right here that also decreases our inventory, but we don't know that number. What we do know is the ending balance. The ending balance in the account was given to us, right? 48,000 on July 31st. Cool? So this is what's always going to be happening throughout accounting courses is you're going to be given a bunch of information and you have to find 1 piece, right? It told us all these other numbers and then it said find COGS. So we have to know how to use all those other numbers and set it up so that we know how to solve for COGS. So, in this situation, it's going to be pretty easy, right? We're going to start with 55,000, add our purchases and then subtract these credits, right? And then there's going to be some number that would bring us down to 48,000. So, how do we figure that out? Well, this is how I would do it. I would start by adding 55,000 of course you could set this up as an algebraic equation, but but I think it's easier to do it this visual way. 55,000 + 25,000 equals 80,000 and then we're going to subtract the purchase discounts, the purchase returns and it gets us to 77,850, right? This is the 55,000 plus 25 minus 650 minus 1500 gets us to 77,850 and we need to get to a final balance of 48,000, right? So the COGS is going to be the amount that brings us down from 77,850 the total of the other numbers down to 48,000. So I want to know what's the difference between the 77,850 that I've calculated minus the 48,000 in the ending balance, well, that's going to tell us that this number here is 29,850, right? So you could double-check now by going 55,000 plus 25,000 minus 650 minus 1500 minus 29,850 gets us to 48,000. So perfect, that is our number. The number is 29,850 and that is COGS for the month of July. So that's the answer right there. 29,850, That's what we solved for. Cool? So there you go. You can see how the T account, how the base equation, they're all sort of related, right? You just have to know where each piece of information fits in the puzzle. Cool? Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the periodic inventory system and how does it work?

The periodic inventory system is a method of inventory management where inventory balances are updated at the end of an accounting period rather than continuously. Throughout the period, purchases, returns, discounts, and allowances are tracked in separate accounts. At the end of the period, a physical inventory count is conducted to determine the ending inventory balance. The cost of goods sold (COGS) is then calculated using the equation:

$\mathrm{Beginning\; Inventory}+\mathrm{Purchases}-\mathrm{Purchase\; Discounts}-\mathrm{Purchase\; Returns}-\mathrm{COGS}=\mathrm{Ending\; Inventory}$

This system emphasizes the importance of accurate inventory counts and financial reporting at the end of each period.

How do you calculate the cost of goods sold (COGS) in a periodic inventory system?

To calculate the cost of goods sold (COGS) in a periodic inventory system, you use the following equation:

$\mathrm{Beginning\; Inventory}+\mathrm{Purchases}-\mathrm{Purchase\; Discounts}-\mathrm{Purchase\; Returns}-\mathrm{COGS}=\mathrm{Ending\; Inventory}$

First, determine the beginning inventory and add any purchases made during the period. Then, subtract purchase discounts and purchase returns. Finally, subtract the ending inventory, which is determined through a physical count at the end of the period. The remaining value is the COGS.

What are the key differences between periodic and perpetual inventory systems?

The key differences between periodic and perpetual inventory systems are:

• Update Frequency: Periodic systems update inventory balances at the end of an accounting period, while perpetual systems update continuously with each transaction.
• COGS Calculation: In periodic systems, COGS is calculated at the end of the period using a specific equation. In perpetual systems, COGS is updated in real-time with each sale.
• Physical Counts: Periodic systems rely heavily on physical inventory counts at the end of the period, whereas perpetual systems use physical counts primarily for verification purposes.

Why is a physical inventory count important in a periodic inventory system?

A physical inventory count is crucial in a periodic inventory system because it provides the actual ending inventory balance, which is necessary for accurate financial reporting. Since inventory balances are not updated continuously, the physical count ensures that the recorded inventory matches the actual inventory on hand. This count helps in calculating the cost of goods sold (COGS) accurately and ensures that the financial statements reflect the true financial position of the company.

What accounts are involved in a periodic inventory system?

In a periodic inventory system, several accounts are involved to track inventory-related transactions. These include:

• Purchases Account: Records the cost of inventory purchased during the period.
• Purchase Returns and Allowances Account: Tracks returns and allowances granted by suppliers.
• Purchase Discounts Account: Records any discounts received on inventory purchases.
• Inventory Account: Reflects the beginning and ending inventory balances, determined through physical counts.

At the end of the period, these accounts are used to calculate the cost of goods sold (COGS) and update the inventory balance.