 Hello, in this lecture we're going to define Periodic Inventory System. According to Fundamental Accounting Principles, while 22nd edition, the definition of Periodic Inventory System is, Method that records cost of inventory purchased but does not continuously track the quantity available or sold to customers. Records are updated at the end of each period to reflect the physical count and cost of goods available. So we're talking about an inventory system, of course, and the periodic part of that inventory system means that we are not going to record the reduction in inventory or the related cost of goods sold at the point of sale, but rather do so periodically, whether that be the end of the day, the end of the week, or the end of the month, after we do a physical count. Let's take a look at an example. If we have the point of sale here we're selling, in this case, ink to the customer, we're getting the IOU. There's two types or two halves to the transaction. We can think of them as two transactions or two parts of one transaction. One is the sale we would see even if we weren't selling inventory, the sale even if we had a service company, which would be an increase in accounts receivable, an increase to sales revenue in this case. The other half of the transaction would be the cost of goods sold side, meaning inventory for us has gone down, cost of goods sold has gone up. This second journal entry would not be recorded at the point of sale under a periodic inventory system. Why? Because we may not even know this, it might be a little bit more complicated for us to do this. If we have our salesperson, they may be more complicated to record the related cost of goods sold and the inventory reduction. We of course would know, our system would know the sales price at that point in time. It may be easier for us to not do the second journal entry and plan to do it based on a physical count at the end of the day, at the end of the week, at the end of the month. So at that time period, we would then say, okay, let's count the inventory that is left. We know what we've been doing here, meaning we have been recording the purchases as we've been purchasing, but we have not been recording the reduction in inventory as we have been selling. Now let's count the inventory and do the second half of the journal entry, which would be a reduction of inventory to the physical count and an increase in the cost of goods sold. So the count might go something like this. We'd say inventory before the count was 100,000. After we do the physical count, maybe we say there's only 25,000 left. That would mean that we have an adjustment of 75,000, meaning this is what was on the books and that includes basically the inventory as of the last time period plus purchases. This is the physical count we have made and therefore the adjustment would be the 75,000. That 75,000 we're assuming is inventory that was sold. A couple of things to note here is that it might not necessarily have been inventory that sold or might have been what they call shrinkage or loss or theft or something like that, but we are making the assumption that this was unit sold. Also note that when we do the physical count, obviously we are counting units and we would have to then convert those units in some way to the dollar amount that's going to be reported in this adjustment. This adjustment then, the 75,000, would be a decrease to inventory that would bring inventory down to the physical count of, in this case, 25,000 and report the related cost of goods sold, the 75,000 and expense that would then be reducing net income.