You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods whenever you eventually complete a physical inventory count.

It does not yield any information about the cost of goods sold or ending inventory balances during interim periods when there has been no physical inventory count. However, there are several problems with the system: For them, a physical inventory count is easy to complete, and they can estimate cost of goods sold figures for interim periods. The periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. Periodic Inventory System Advantages and Disadvantages Thus, there is not a direct linkage between sales and inventory in a periodic inventory system. There is not a corresponding and immediate decline in the inventory balance at the same time, because the periodic inventory system only adjusts the inventory balance at the end of the accounting period. The following entry shows the transaction that you record under a periodic inventory system when you sell goods. The end result is the same, but with fewer entries.Īn additional entry that is related to the periodic inventory system, but which does not directly impact inventory, is the sale transaction. By waiting, you can then merge the final two entries together and apportion the balance in the purchases account between the inventory account and the cost of goods sold, using the following entry. It then subtracts this actual ending inventory cost from the cost that has accumulated in the inventory account, and charges the difference to the cost of goods sold account with this entry:Ī variation on the last two entries is to not shift the balance in the purchases account into the inventory account until after the physical count has been completed. The final periodic inventory entry in an accounting period arises immediately after the physical count of the inventory, when the accounting staff establishes the actual cost of the inventory on hand at the end of the month. The reason is that the level of inventory tracking is so infrequent that there is no point in using additional inventory accounts, since the balance in any one account will likely be inaccurate in comparison to the actual inventory count at any given time. Notice that there is no particular need to divide the inventory account into a variety of subsets, such as raw materials, work-in-process, or finished goods. Under a periodic inventory system, inventory purchases made by a company are initially stored in a purchases (asset) account with the following journal entry: = $190,000 Cost of goods sold Periodic Inventory Accounting The calculation of its cost of goods sold is: The calculation of the cost of goods sold under the periodic inventory system is:īeginning inventory + Purchases = Cost of goods available for saleĬost of goods available for sale – Ending inventory = Cost of goods soldįor example, Milagro Corporation has beginning inventory of $100,000, has paid $170,000 for purchases, and its physical inventory count reveals an ending inventory cost of $80,000. When a physical inventory count is done, the balance in the purchases account is then shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory. Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or year. A periodic inventory system only updates the ending inventory balance in the general ledger when a physical inventory count is conducted.

Ending inventory meaning