In the periodic inventory method, inventory is calculated periodically (monthly, quarterly, or annually). Inventory is not updated during daily transactions, but inventory is calculated at the end of a certain period and cost is calculated.
Periodic Inventory Method Accounting Process
In this method the inventory account is subsequently updated and the inventory account is adjusted after a certain period of time.
Purchase of inventory items: When goods are purchased it is recorded as a separate purchases account.
Example 01: 100 units of product are purchased at $10 per unit:
Dr. Purchase $1,000
Cr. Cash/Debt $1,000
Sale of goods: No accounting of inventory is done at the time of sale, only sales entry is recorded.
Example 02: 50 units of product are sold at $15:
Dr. Cash $750
Cr. Sales $750
Closing Entries: At the end of specified period inventory is counted and inventory and COGS are reconciled.
Example 03: Beginning inventory is $2,000, purchases are $1,000, and ending inventory is $1,200, then:
COGS = Beginning Inventory + Purchases – Ending Inventory
COGS = $2,000 + $1,000 – $1,200 = $1,800
Closing Entry:
Dr. Reserve $1,200
Dr. COGS $1,800
Cr. Purchase $1,000
Cr. Opening Balance $2,000
Advantages of periodic inventory method:
i) Easy and cheap.
ii) Suitable for low turnover business.
Disadvantages:
i) Updating inventory at the end of time is more prone to errors.
ii) Stock shortages or overstocks are not easily identified.
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