Periodic Inventory System Journal Entries

Periodic inventory system updates inventory balance once in a period. We discussed this concept in the perpetual-periodic inventory comparison. Here, we will learn the typical journal entries under a periodic inventory system.

Let us assume that all sales and purchases are on credit. Also assume that where discounts are provided or availed on sales/purchases, they are recorded using the gross method (to learn more about gross method, see discount on sales and discount on inventory purchases).

Following are the typical journal entries under a periodic inventory system:

Inventory Purchase:
The purchase of inventory is recorded by debiting purchases account and crediting accounts payable.

Purchases— —
Accounts Payable— —

Purchase Discount:
Under gross method, purchase discount is recorded using the following journal entry:

Accounts Payable— —
Purchase Discounts— —

Note: The above two journal entries are usually combined in a single entry which is shown below:

Purchases— —
Accounts Payable— —
Purchase Discounts— —

Purchase Return:
Purchase returns are recorded as shown below

Accounts Payable/Accounts Receivable— —
Purchase Returns— —

Inventory Sale:
Unlike perpetual inventory system, the periodic inventory system records the transaction of sale via a single journal entry:

Accounts Receivable— —
Sales— —

Sales Discounts:
A sales discount is recorded as shown below:

Sales Discount— —
Accounts Receivable— —

Again, the above two entries are combined in a period inventory system as shown below:

Accounts Receivable— —
Sales Discounts— —
Sales— —

Sales Return:
Similarly, sale returns are also recorded via a single journal entry:

Sales Returns— —
Accounts Receivable/Accounts Payable— —

At the end of each accounting period, the value of ending inventory is determined by physical count. Cost of goods sold is determined either as a balancing figure in the closing entry shown at the end or by using the following formula:

COGS = Beginning Inventory + Purchases − Ending Inventory

The closing entry required in a periodic inventory system debits:

  • inventory account by the value of ending inventory
  • cost of goods sold account by the value as determined above or by the balancing figure

and credits:

  • inventory account by beginning inventory
  • purchases account

The entry is shown below:

Inventory (Ending Inventory)— —
Cost of Goods Sold (Balancing Figure)— —
Inventory (Beginning Inventory)— —
Purchases— —

A simplified form of the above journal entry uses a single debit or credit to inventory account by calculating the difference of ending inventory and beginning inventory. If the difference is positive, the inventory account will be debited for the difference and if it the difference is negative, the journal entry will credit the inventory account by the difference.

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