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Accounting Practices 501 Chapter 6 Inventory (Periodic system) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011
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Accounting Practices 501
Chapter 6
Inventory
(Periodic system)
Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011
Periodic System
Ch6B - Periodic system
This is a system, whereby the inventory is manually counted before
cost of sales can be calculated
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
Example of calculating COS
Ch6B - Periodic system
Opening inventory Add Purchases
Cost of Sales
$50,000
Less Closing inventory
60,000110,00
040,000$70,000
Other items could also be included
Ch6B - Periodic system
Opening inventory
Add Purchases
Cost of Sales
$50,000
Add Customs Duty
Add Freight In
Less Closing inventory
58,00010,0005,000
123,00040,000$83,00
0
Any costs incurred in getting the product ready for sale, are included in the cost of sales
Ch6B - Periodic system
Opening inventory
Add Purchases
Cost of Sales
$50,000
60,000110,00
040,000$70,000
Where did we get the Opening inventory figure from?
From last year’s Inventory figure
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
Ch6B - Periodic system
Let’s have a look at a list of accounts
List of accounts as at 31 March X2
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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 no Debit Credit
1/4 Opening inventory 4,000
Inventory 4,000
Being entry to record opening inventory at 1 April 20X2
20X2
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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
15,000Inventory
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
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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
15,000Inventory
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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 no Debit Credit
31/3 Inventory 15,000
Closing inventory 15,000
Being entry to record closing inventory at 31 March 20X2
20X2
Closing inventory 15,000
15,000Inventory
Bank $20,000
Accounts Payable 8,000
Accounts Receivable 15,000
Inventory (1/4/X1) 4,000
Sales 100,000
Purchases 40,000
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
15,000Inventory
Date
General Ledger
Details BalINVENTORY
Opening Balance 4,000 Dr
OPENING INVENTORY
31/3Opening inventory NIL 4,000
1/4 Inventory 4,000 4,000 Dr
CLOSING INVENTORY31/3 Inventory 15,000 15,000 Cr
31/3 Closing inventory 15,000 15,000 Dr
General JournalDate Account Titles Ref no Debit
1/4 Opening inventory 4,000
Inventory 4,000
20X2
Credit
31/3 Inventory 15,000
Closing inventory 15,000
1/4
Ch6B - Periodic system
Dr Cr
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 LedgerDetails Dr Cr BalINVENTORY
Opening Balance 4,000 Dr
OPENING INVENTORY
31/3Opening inventory NIL 4,000
1/4 Inventory 4,000 4,000 Dr
CLOSING INVENTORY
31/3 Inventory 15,000 15,000 Cr
31/3 Closing inventory 15,000 15,000 Dr
1/4
Don’t we justlove
Accounting?
Ch6B - Periodic system
