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.
4. Merchandising Operations
Periodic Inventory - Purchasing Summary
4. Merchandising Operations
Periodic Inventory - Purchasing Summary - Online Tutor, Practice Problems & Exam Prep
In a periodic system, we must physically count the remaining inventory at the end of the period to calculate Cost of Goods Sold.
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Periodic Inventory:Purchasing Summary
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