Accounting Demystified

Periodic Inventory System

The periodic inventory system assumes that a company is not able to record Cost of goods sold at the same time that the sale is recorded. Instead, the cost of goods sold will be recorded at the end of an accounting period. When we record the entries for a merchandising company that uses the periodic inventory system, such items as purchases, freight in, and purchase returns are all recorded in separate accounts. In the perpetual system, everything is recorded in the Merchandise inventory account, and in the periodic system, everything is recorded in separate accounts. Here are some examples of the periodic system in action:

Purchase 1,000 units at $45 each:

Sell 500 units at $80 each:

Return of 300 of the units purchased: ...