Cost of Goods Sold: Periodic System

  • Compute the cost of goods sold under a periodic system and create journal entries

 

What we have now learned is that using the periodic inventory system the cost of goods sold (COGS) is computed as follows:

Beginning inventory + (Purchases, net of returns and allowances, and purchase discounts) + freight in − Ending inventory = Cost of goods sold

Which looks like this on an income statement:

Geyer Co.
Income Statement (partial)
For the year ended December 31, 20XX
Sales Revenue, net $2,548,959
Subcategory, Cost of goods sold
  Merchandise inventory, January 1, 20XX $457,897
  Purchases 1,532,444
  Less purchase discounts 20,222
  Less returns and allowances 56,000
  Purchases, net Single Line 1,456,222
Plus Freight in 66,231
  Goods available for sale Single Line$1,980,350
  Less merchandise inventory, December 31, 20XX 238,687
        Cost of goods sold Single Line 1,741,663
Gross profit Single Line$807,296Double Line
Gross profit % 31.67%

After the financial statements have been prepared at the end of the accounting period, as part of the closing process, we zero out the purchase accounts and post the difference to Inventory. If we did our work correctly, it would look like this (all other accounts are omitted for clarity):

Two T accounts side by side. On the left is an inventory chart. There is an ending balance carried over on the debit side of 457,897 dollars. There is a credit entry of 220,009 dollars. There is a debit total of 237,888 dollars. On the right is an income summary. There is a debit entry of 1,745,462 dollars. On the credit side there is a note stating 'Will be closed to capital'. The debit total is represented as a dash.

Two T accounts side by side. On the left is a purchases chart. There is an ending balance carried over on the debit side of 1,532,444 dollars. There is a credit entry of 1,532,444 dollars. On the right is a purchase returns and allowances chart. There is an ending balance carried over on the credit side of 56,000 dollars. There is a debit entry of 56,000 dollars. The credit total is represented as a dash.

Two T accounts side by side. On the left is a freight in chart. There is an ending balance carried over on the debit side of 66,231 dollars. There is a credit entry of 66,231 dollars. The debit total is represented as a dash. On the right is a purchase discounts chart. There is an ending balance carried over on the credit side of 20,222 dollars. There is a debit entry of 20,222 dollars. The credit total is represented as a dash.

Notice the final journal entry, and in fact, the only journal entry to Merchandise Inventory is an adjustment to bring beginning inventory to the right ending balance.

In the next module, we’ll delve into the process of determining the dollar value of ending inventory. First, let’s see how the periodic system evolved into the more commonly used perpetual system, and how that system is both similar to and different than the periodic system.