 In this presentation we will discuss a periodic inventory system. As we discuss the periodic inventory system we want to keep in mind and contrast the perpetual inventory system. That's the inventory system we will most likely be seeing and using when discussing inventory. But the periodic system is actually used more often when we have a less sophisticated system. So if we're working in a situation where we don't have a sophisticated system we would more likely be using a periodic system in order to simplify that system. If we have a more complex system or a system that has a better ability to pick up the information as we record it such as an electronic system a scanner that knows the cost of items as we go then we would want to use a perpetual inventory system which would be preferred and it's just a trade-off between the added cost of a system like that and the time that it would take for a perpetual system versus the ease but less information we have during the process on a periodic type of system. As we go through this we're going to look through some transactions, some purchases and some sales on a periodic method. We're going to have our journal entry it's going to be recorded on the left side this will be our chart of accounts on the right side the journal entry will have both debit and credit columns as well as credits and brackets the chart of the accounts will only have on the trial balance the debits and credits being represented by debits not having brackets or positive numbers credits having brackets or negative numbers and then this zero will show that the debits minus the credits equals zero meaning debits equal the credits then we'll post this information and see what we end up with so that we can see this activity in a nice little worksheet see which accounts are affected which type of accounts assets liability equity income and expense accounts are affected and the effect on net income starting with purchase merchandise on account this is going to be a transaction that will not differ under either method if we have a perpetual or periodic system we're going to purchase the merchandise same transaction we're going to say is cash affected no because we purchased it in this case on account that means we purchased it with accounts payable but i would first think about what we got we got merchandise inventory inventory as an asset has a debit balance we need to make it go up we're going to do therefore the same thing to it another debit so here's the debit to merchandise inventory we're going to credit something now and now we can say okay it's accounts payable and we already know that we're going to credit having done the merchandise inventory first then so we're going to say we're going to credit the accounts payable that makes sense because accounts payable has a credit balance indicated by the brackets here the bad thing is going up we owe more money because we purchased something on an account therefore we do the same thing to it another credit if we post this out then we have the merchandise inventory here which we will post here we have the ten thousand dollar debit balance it's going to increase by another debit of 13 000 to a total of 23 000 then we have the accounts payable 6 500 credit we're going to do the same thing to it this credit is going to be posted 13 000 plus the 6 500 gives us the amount owed in accounts payable 19 500 the effect on the accounting equation assets are going up inventory is going up the liabilities are going up because the accounts payable is going up and the equity remains the same we see all the accounts here we can see the transaction here we can see that there is we're still in balance and no effect on net income we purchased inventory we didn't expense the inventory because we have not yet used it we will expense it at the point it is used at the point of sale in the form of cost of goods sold so note one more time this journal entry is the same under either method perpetual or periodic next transaction sale for 3128 cost 2400 this will be a transaction that will differ under the periodic and perpetual system the perpetual system what we're not doing here would record both the sales portion and the cost portion under a periodic system what we are doing here we will record just the sales portion recording the cost at the end at the late at the end of the time period month week year whatever we're doing here and we're going to do that by doing a physical count so if a problem gives you the cost at the point in time that we are working a periodic system it doesn't matter we don't need the cost and in practice the fact that we may not know the cost is part of the problem meaning if we are trying to have someone run our store basically and we just want a clerk up there to be recording transactions collecting cash giving back change and we don't have a sophisticated electronic system then they know the sticker price of course when someone pays them they know how much money they got what they do not know because it's not on the sticker price is the cost so we don't want our clerk to have to figure out the cost in order to record the cost every single time someone comes up that would take a more experienced clerk someone that was able to do that what we want them to do and if we were doing it too we want to be as easy as possible we want to focus on sales therefore we're just going to record the sales portion that's easy we're focused on giving back the change relating to the to the customer and then we'll figure out the cost at the end now if we had a very if we had a nice system that was a scanner system that knew the cost at that point and I wouldn't even need to know it or think about it then we can use that system and it would be just an automatic type of system so if we don't have that we're often using this periodic system and the journal entry would be the same as if we're a service company we would say we're going to assume we got the not cash and we've made it on account so on account we've got the accounts receivable is going up it has a debit balance we're going to make it go up by doing the same thing to it another debit and then the other side would be some kind of revenue account so we're talking sales in this case here's the sales account it could be revenue it could be income if there's a service company be fees earned it's just another name for the same thing a revenue account revenue accounts have credit balances it will be going up so we're going to do the same thing to it another credit so then what if we post this then we're posting this accounts receivable here so there's a debit and a debit 6000 plus the debit of 3120 brings us up to 9120 then we're going to post this sales credit to the sales item here so we have zero going up by 3120 in the credit direction to 3120 effect on the accounting equation is the assets are increasing by the accounts receivable the liabilities are not affected and the equity is going up because sales is going up sales is increasing the net income calculation of revenue minus expenses and net income is part of equity when net income increases total equity increases we look at all of the transactions all the balances here we can see that we are in balance we can see this effect on net income here that's from this account here so this part down that's the income statement so it went up in the credit direction this isn't a loss this is income representing a credit of 3120 and of course the assets of accounts receivable too went up next transaction we're going to have another purchase purchase merchandise on account for 6000 just to mention here obviously if if this was a perpetual system we would have the other side of this too being cost of goods sold and merchandise inventory that's what we're leaving out in a periodic system that's what we do at the end of the time period that's what we'll get done through a physical count now we're going to go back to another purchase we purchased merchandise on account remember that the purchases will be the same under the two method it is what it is we're going to pay what we pay we got what we got under the purchase item so we're going to purchase on account meaning we're not going to pay cash we are instead going to be paying with accounts payable but first to think about the debits and credits which might be more easy to think about what we got what we got merchandise inventory which is an asset got more of it therefore goes up how do we make something go up we do the same thing to it another debit in this case so we're going to debit merchandise inventory then we know we're going to credit something for 6000 because we have a debit there and we know that that then is going to be accounts payable so by thinking about merchandise inventory first it might help us to know that the credit is going to be going to accounts payable and the reason I think that the benefit is because we deal with cash a lot so we probably have more experience increasing and decreasing asset accounts than possibly liability accounts which we don't work with quite as often so if we do that then we have if we double check that we'll say this is a credit balance in accounts payable we need to make it go up the bad things going up because we bought something and didn't pay for it therefore oh on it so we do the same thing to it which in this case is another credit posting this out then we've got the merchandise inventory at 6000 debit we're going to post that here to the merchandise inventory account we have 23 000 starting we do the same thing to it another debit bringing the merchandise inventory to a balance of 29 000 then the accounts payable we're going to post this to accounts payable 19 500 credit represented by the brackets we're posting this we're just bringing this over and posting the 6000 there bringing the balance up to 25 500 accounting equation we see that the assets are going up as merchandise is going up the liabilities are going up because we owe more money and accounts payable equity not affected if we see all the accounts then we see that we are in balance by the green zeros debits equaling the credits and we see that there's no effect on net income no effect on net income which are going to be these accounts we did buy inventory we have not yet used it therefore put it on the books as an asset not as an expense it will be expense when when we sell it in the form of cost of good soul the form of expense next transaction another sale so we're going to have a sale on account this will be the transaction that differs when we're going from a perpetual to a periodic system how does it differ well it'll be the same on the sales half of it and we will be eliminating the cost half of this transaction in a periodic system picking it up at the end of the process when we do a physical count as opposed to a perpetual system where we would record this as we go so note what we're doing here on a periodic system we're only going to be recording pretty much the same thing we would if we were not a merchandising company if we were just a service company with no inventory meaning we're going to record the sale uh and so if we did work and and we got money we didn't get money yet but we got accounts receivable the accounts receivable is going up it's a debit balance account so we're going to do the same thing to it which is another debit so there's the debit to accounts receivable the other side then would be some type of sales account and if it was a service company fees are impossible possibly just an account called income or revenue when it's a merchandising company all we do is change the name to sales typically that's a normal name that often we will see in a merchandising company has a credit balance we're going to do the same thing to it which in this case is another credit so here's our journal entry it's that it's a more simplified method that's all we need to do what we are eliminating in the periodic method that we would be including if it were a perpetual method is the inventory going down and the cost of goods sold going up bringing net income down we will do that at the end when we do a physical count of the inventory post in this out we're going to say the receivable has a debit here we're going to increase it here so the debit of 9120 in the accounts receivable goes up by this two thousand three forty two a balance of eleven thousand four hundred and sixty the sales has a credit here two thousand three forty we're going to increase this sales here three thousand one twenty by that credit of two thousand three hundred and forty two a balance of five thousand four hundred and sixty accounting equation the assets are going up because receivables went up the liabilities remain the same and the equity is going up because sales went up revenue went up bringing the net income calculation of revenue minus expenses up net income will affect the total equity in the same way that it is affected meaning if net income goes up total equity goes up here's the full transaction with all the other accounts we can see we are in balance by the green zeros we can see that net income is increasing that's this part of the calculation here the sales are increasing net income that's not a loss that's revenue revenue going up and of course the assets are going up with the accounts receivable then we're going to see the ending inventory so we're saying we're at the end of the time period now we're at the end of the time period and we're trying to figure out okay so it's the end of the month and we have accounts receivable and sales but the periodic system is not very accurate until the end of the period when we do the physical count because until that time it looks like revenue is way higher than it is because we are missing our most important our largest cost that being the cost of us using the inventory in order to generate that the cost of us giving the inventory away in order to generate revenue that cost called cost of goods sold so what we're going to do is we're going to do a physical count in order to figure out you know how much inventory is left now we're going to not go to the process we're just going to say there's twenty four thousand eight hundred dollars worth of inventory in other words now in real life of course we would have to count the inventory in units and then convert it to dollars that conversion can be a little bit more tricky than we would think at first and therefore we're going to go into that process later and use some different methods including LIFO FIFO average or specific identification at a later time but now for now we need to just know on a periodic system we're going to count it now also note that if it was a very simplified system and all the all the stuff is the same the units are worth the same or cost the same then it's not a problem it's an easy calculation it's an easy conversion but when we purchase things and the price changes over time converting from the units to the dollar amount can be a little bit more tricky so in any case we're going to say that we counted it and we have twenty four thousand eight hundred dollars worth of inventory left we're going to use that fact in order to adjust our Indian inventory to the correct amount because note what we did not do through the time period we never reduced the inventory even though we were selling it meaning we recorded the beginning balance plus purchases but had not decreased it as we sold the items and so that's what we need to account for in our periodic system now so we're going to do the cost of good soul calculation very important calculation whether it be using the perpetual or periodic system and here it is cost good so we have the beginning inventory ten thousand you can see that on the first trial balance that we started with here and in real life you can go to if we were working with this we would want to go to the general ledger and see that beginning balance what we started with in the inventory accounts ten thousand dollars we're increasing that by purchases these are the two purchases we made during this time period nineteen thousand again if we were looking at the general ledger we would be able to see the increases what we would not be seeing throughout this time period are any decreases to the merchandise so that's going to give us our twenty nine thousand which is basically what matches what we have on our books right now and what we haven't done is of course record the decrease now we don't know exactly what the decrease was what we do know is we counted our inventory and we have twenty four thousand eight hundred left this number represents what we could have sold during the time period in dollar amounts meaning we didn't have this at any given time but throughout the month we had twenty nine thousand dollars worth of different inventory going in and out throughout that time period meaning throughout the month we could have sold a maximum of twenty nine thousand dollars worth of inventory could not sell more because we didn't have more than that that's the max that we could have sold and then if we compare that then to our ending inventory which we got through a physical count the twenty nine thousand minus the twenty four thousand eight hundred ending inventory gives us the cost of the goods that we sold four thousand two hundred so this is what we're missing here we're missing this four thousand two hundred and we're missing the fact that this merchandise inventory went down by four thousand two hundred so this merchandise inventory needs to match this this cost a good sold needs to match that and we're going to do that with a journal entry so here's our calculation once again we're going to we're going to make the journal entry note i've added some units here just so you can see that we we could do this calculation with units as well so if it told us that uh i mean if we counted that we had uh ending inventory of two thousand four hundred and eighty units that's how much we counted and we said that they the unit cost was ten dollars then we can multiply this out and we can figure out that it would be twenty four thousand eight hundred in terms of dollars so if we have a nice even unit cost that conversion is not too difficult it would look something like this note this cost a good sold calculation can be done in terms of units here as well as in terms of dollars and you want to be sure just like with any measurement method that we know which method we're using and not mixing up units to dollars and uh and so then you can convert it through this conversion so if we record this then we got the four thousand two hundred we're going to increase cost of good sold by that so here's the cost of good sold and we're going to increase the merchandise inventory here's the merchandise inventory if we post this out then we're going to say merchandise inventory uh is here it's going to go down and it might be easier to this to list out merchandise inventory first even though it's on the bottom because it's often easier for us to visualize what merchandise inventory is than cost of good sold merchandise inventory we can think of as an asset a physical thing that we're actually gave away during the sales process therefore it must go down and it has a debit balance so we needed to credit it so we're going to credit it so the merchandise inventory had twenty nine thousand we're making it go down by four thousand two hundred the amount of the cost of good sold we calculated or the difference in other words between what we had on the books the amount of available for sale and what we counted the ending in the inventory to be given us that twenty four thousand eight hundred what we counted the ending inventory to be and then the other side of it this cost of good sold is going to be calculated here starting at zero going up by four thousand two hundred in the debit direction bringing us to an ending balance of four thousand two hundred if we take a look at the full transaction we can see that we are back in balance we can see that the total assets are decreasing because we decrease the merchandise inventory for the amount that we sold we can see that the cost of good sold is going up that's going to decrease net income net income started here that's not a loss that's the revenue here minus the expenses and the contra accounts these two are actually contra accounts and cost good sold is the expense and then what we did is we had the four thousand two hundred cost of good sold which we put in place which is the cost of good sold not just for this day of course but the cost of good sold for the entire period the tire the whatever we're doing this over a day a month a week probably not a year day month or week we have the four thousand two hundred so our ending result then we had five thousand four hundred sixty over this time period but now we're recording the fact that we had to expend not in terms of dollars at the point of time of sale but in terms of merchandise four thousand two hundred dollars worth of merchandise the difference now being five thousand four hundred sixty minus the four thousand two hundred given us the one thousand two hundred and sixty note that the perpetual system and the periodic system will end up result in the same location so we should be at the same point at the end of the time period the perpetual system however has the benefit of tracking it as we go so it should be basically correct throughout the system and it also gives us kind of that double check that it should already have this number at the end of the time period and then we can double check it through the cost of good sold which is a better method to check if we had anything like theft or spoilage or shrinkage something other than a selling inventory that made the ending inventory go down note under this method what we're doing is we're just figuring out what the ending inventory should be and we're assuming that this difference was all due to sales that happened but it is quite possible that the ending inventory went down for some reason other than sales and that could have been theft or spoilage or loss or breakage or something like that and the perpetual system makes it easier for us to track that