1. Accounting Practices 501 Chapter 6 Inventory (Periodic system) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

2. Periodic System Ch6B - Periodic system This is a system, whereby the inventory is manually counted before cost of sales can be calculated

3. Periodic System Regular stocktakes necessary Uses a Purchases expense account Cost of sales to be manually calculated Inventory levels only known after a physical stocktake is done Closing inventory figure becomes the opening inventory figure in the next period Ch6B - Periodic system

4. Example of calculating COS Ch6B - Periodic system Opening inventory Add Purchases Cost of Sales $50,000 Less Closing inventory 60,000 110,000 40,000 $70,000 Other items could also be included

5. Ch6B - Periodic system Opening inventory Add Purchases Cost of Sales $50,000 Add Customs Duty Add Freight In Less Closing inventory 58,000 10,000 5,000 123,000 40,000 $83,000 Any costs incurred in getting the product ready for sale, are included in the cost of sales

6. Ch6B - Periodic system Opening inventory Add Purchases Cost of Sales $50,000 60,000 110,000 40,000 $70,000 Where did we get the Opening inventory figure from? From last year’s Inventory figure

7. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system Let’s have a look at a list of accounts List of accounts as at 31 March X2

8. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system The previous year’s Inventory figure, will become the current year’s Opening inventory figure on 1 April List of accounts as at 31 March X2 Opening inventory

9. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory We know that Inventory has a debit balance and therefore we need to credit it to transfer it to Opening inventory General Journal Date Account Titles Ref noDebitCredit 1/4 Opening inventory4,000 Inventory 4,000 Being entry to record opening inventory at 1 April 20X2 20X2

10. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory But, what about the Closing inventory figure? After a stocktake has been done at the end of the period (31 March), we need to record the value of the counted stock

11. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory The Inventory account at this stage shows a zero balance after the transfer to the Opening inventory account Closing inventory 15,000 Inventory The counted stock at 31 March represents the Inventory current asset of the business The counted stock at 31 March also represents the Closing inventory used to calculate the cost of sales Let’s say that the counted stock at 31 March X2 is $15,000

12. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory Now let’s do it the proper way with debits and credits Closing inventory 15,000 Inventory

13. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory We know that Inventory is an asset and therefore we need to debit it to General Journal Date Account Titles Ref noDebitCredit 31/3 Inventory15,000 Closing inventory 15,000 Being entry to record closing inventory at 31 March 20X2 20X2 Closing inventory 15,000 Inventory

14. Bank$20,000 Accounts Payable8,000 Accounts Receivable15,000 Inventory (1/4/X1)4,000 Sales100,000 Purchases40,000 Ch6B - Periodic system List of accounts as at 31 March X2 Opening inventory Let’s see what we have so far! Closing inventory 15,000 Inventory

15. Date General Ledger Details Bal INVENTORY Opening Balance 4,000Dr OPENING INVENTORY 31/3 Opening inventoryNIL4,000 1/4 Inventory4,000 Dr CLOSING INVENTORY 31/3 Inventory15,000 Cr 31/3 Closing inventory15,000 Dr General Journal Date Account Titles Ref noDebit 1/4 Opening inventory4,000 Inventory 4,000 20X2 Credit 31/3 Inventory15,000 Closing inventory 15,000 1/4 Ch6B - Periodic system DrCr

16. Closing inventory and Opening inventory figures are used to calculate the Cost of Sales in the Income Statement Ch6B - Periodic system Inventory is a current asset shown in the Balance Sheet Date General Ledger Details DrCrBal INVENTORY Opening Balance 4,000Dr OPENING INVENTORY 31/3 Opening inventoryNIL4,000 1/4 Inventory4,000 Dr CLOSING INVENTORY 31/3 Inventory15,000 Cr 31/3 Closing inventory15,000 Dr 1/4

17. Don’t we just love Accounting? Ch6B - Periodic system