1. Periodic Inventory System

2. Periodic Inventory Detailed inventory records of the goods on hand are NOT kept throughout the period Used for low-unit cost, high-volume turnover goods A physical inventory count is done to determine the quantity and cost of goods on hand at the end of the accounting period The amount is deducted from the goods available for sale to determine the COGS

3. Purchases When merchandise is purchased, it is recorded in the Purchases account at cost price, not in the Inventory account (inventory is only updated at the end of the fiscal period). This is an expense account. Purchases (at Cost Price) 3800 Bank or A/P3800 To record the Purchase of Inventory invoice #731 terms 2/10, n/30

4. Freight-in Account (Periodic) Considered part of COG purchased Used to accumulate any transportation charges on incoming goods Kept separate from transportation charges on outgoing goods (recorded in Delivery Expense) Usually placed right after Purchases account in ledger Duty – special charges imposed by the government on certain goods imported from a foreign country

5. Journal Entry June 27 Freight-In 150 Bank150 -to record freight charges on purchases

6. Purchase Returns & Allowances Is a temporary account, normal balance is a credit. It is a contra account whose balance is deducted from the balance in the Purchases account Bank or A/P 300 Purchase Returns & Allowances300 To record return of goods.

7. Purchase Discounts Also a temporary account, normal balance is Credit. It is a contra expense account subtracted from the Purchases account to calculate net purchases. Accounts Payable3500 Purchase Discounts (3500*2%)70 Bank (3500-70)3430 To record payment of invoice #731 within discount period.

8. Sale of Merchandise When merchandise is sold the transaction is recorded at the selling price of the items. Bank or A/R (at Selling Price) 3800 Sales (at Selling Price) 3800 To record the sale invoice #731

9. Sales Returns & Allowances Sales Returns & Allowances300 Accounts Receivable300 To record credit given for returned goods.

10. Sales Discounts Cash 3430 Sales Discounts 70 Accounts Receivable3500 To record collection of invoice #731 within discount period. Note- sales entries are the same for both system however there is an extra entry in perpetual for sales returns to return merch. back into inventory.

11. COGS Three steps in a periodic system: Calculate cost of goods purchased Determine cost of goods on hand at the beginning and end of the accounting period Calculate the cost of goods sold

12. Cost of goods purchased Purchases325000 Less: Purch. Returns & allow 10400 Purch discounts6800 17200 Net Purchases 307800 Add: Freight in 12200 Cost of goods purchased $32000

13. Cost of Goods on Hand Must take a physical count of inventory Total cost of goods on hand is the ending inventory

14. Cost of Goods Sold Add cost of goods purchased to cost of goods on hand at the beginning of the period = cost of goods available for sale Subtract cost of goods on hand (ending inventory) from cost of goods avail. For sale = cost of goods sold

15. Inventory June 1, 201035000 Purchases 325000 Less: Purch. Returns & allow&disc. 17200 Net Purchases 307800 Add: Freight in 12200 Cost of goods purchased 320000 Cost of Goods avail. For sale 355000 Inventory May 31, 2011 40000 Cost of Goods Sold $315000

16. RECAP COGS Cost of beginning inventory + cost of goods purchased = Cost of goods available for sale – cost of ending inventory = cost of goods sold i.e.42500+143000=185500-36400 = 149100 COGS

17. This section only for periodic system

18. Closing Entries Two journal entries to close Merchandise Inventory account Income Summary35000 Merchandise Inventory35000 To close the beginning inventory Merchandise Inventory40000 Income Summary 40000 To close the ending inventory

19. Worksheet Original NEW Close all

20. RECAP Final inventory figure recorded on balance sheets as Current Asset Cost of Goods Sold recorded on income statement Neither inventory figure or COGS known during accounting period

21. New accounts