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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

4. Merchandising Operations

Periodic Inventory - Purchasing Summary

In a periodic system, we must physically count the remaining inventory at the end of the period to calculate Cost of Goods Sold.


Periodic Inventory:Purchasing Summary

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Alright. So now let's summarize everything. We've learned about purchases in a periodic system. Let's put it all in one page now. So throughout the period we're gonna see that these balances are going to be building up in all the inventory related accounts right? We have the purchases account that's going to be building balances for the purchases, purchase returns, purchase allowances, purchase discounts, right? There's all these accounts that are building up balances Well, at the end of the period, remember in a periodic system we're not making journal entries for cost of goods sold as we go. We're gonna figure out cost of good soul now at the end of the period. So we're gonna calculate the cost of goods sold in a periodic system. Okay? So we're gonna use that standard base equation. This is we've used this before, this is where we start with the beginning balance, we're gonna add stuff to it subtracts stuff to it and then it gets to the ending balance. So when we talk about inventory specifically, we're gonna have an inventory beginning balance, then we're gonna add the purchases to the inventory. We're gonna subtract the purchase discounts, the purchase returns and allowances and cogs, right? Cogs comes out of inventory as well, our cost of goods sold and then we'll have our ending balance in inventory. Okay, So the difference here between perpetual and periodic in a perpetual system. Since we're making all the entries as we go. Well, we would know the ending balance in inventory. We would know the balance in cogs in this case, we didn't keep track of cogs as we went, we're gonna figure it out at this point. So a key thing in the periodic system is a physical inventory account. Okay, so in the periodic system at the end of the period it's now let's say december 31st of the year, we're literally gonna count all the inventory, we're gonna go into the warehouse and we're gonna count everything. How much you know of this product do we have? How much of this? And we're gonna find a value of our ending inventory? Okay. So what I want you to know is that in this course obviously when you get a problem on a piece of paper, there's no way for you to count the inventory. So this is always going to be given in these types of problems. They have to tell you something like the physical count at the end of the year showed that a balance of blah blah blah, right? They're gonna have to tell you uh what that number is. Cool. So let's go ahead and see this example for a periodic inventory company where we're gonna calculate cogs um using all this information. Okay. I guess before we jump in there, I want to consider the idea. No let's just go right in I think this will be just fine. So notice in this example they give us an inventory for July one, that's our beginning balance for the month. They give us the inventory balance on july 31st. Right? This is the ending balance and this would have come from some physical count. They would have counted everything and then said okay this is the value that's left in our warehouse. 48,000. Cool. And then during the month we purchased 25,000 discounts blah blah blah. And then it tells us some stuff about accounts payable here. But notice we don't need that information accounts payable is irrelevant to solving for cogs, find cogs. It's going to be in the inventory account. Okay So let's see how this can work remember in a periodic system. All of these numbers, purchases, purchase discounts, they would have all been in separate accounts but at the end of the day we're gonna put them all together into inventory to see how it affects inventory. Okay. So we would have had our inventory t. Account. Okay. And it would have had a beginning balance of 55,000. Right? That's what it told us on July one. That's our beginning balance. Right? And then what do we do? We purchase stuff during the month? Right. We purchased 25,000 worth of goods purchases. And then we're gonna purchase discounts 650 over here. 1500 for the returns and allowances. Those are also things that decrease. So these r. p. discounts and this was purchase returns. I'll just put returns that returns and allowances together there. Okay So there's one more thing here. Right? There would be some cogs number right here. That also decreases our inventory. But we don't know that number. What we do know is the ending balance, The ending balance in the account was given to us, right? 48,000 on July 31. Cool. So this is what's always going to be happening throughout accounting courses. You're gonna be given a bunch of information and you have to find one piece right? It told us all these other numbers and then it said find cause So we have to know how to use all those other numbers and and set it up so that we know how to solve for Cogs. So in this situation it's gonna be pretty easy. Right? We're gonna start with 55,000 at our purchases and then subtract these credits. Right, and then there's gonna be some number that would bring us down to 48,000. So how do we figure that out? Well, this is how I would do it. I would start by adding 55,000. Of course you could set this up as an algebraic equation. Um But I think it's easier to do it this visual way. 55,000 plus 25,000 equals 80,000. And then we're gonna subtract the purchase discounts the purchase returns and it gets us to 77,850. Right? This is the 55,000 plus 25 minus 6 50 minus 1500 gets us to 8 77,050. And we need to get to a final balance of of 48,000. Right? So the cogs is gonna be the amount that brings us down from 77 8 50. The total of the other numbers down to 48,000. So I want to know what's the difference between the 77 8 50 that I've calculated minus the 48,000 in the ending balance. Well, that's gonna tell us that this number here is 29 8 50. Right? So you could double check now by going 55,000 plus 25,000 minus 6 50 minus 1500 minus 29 8 50 gets us to 48,000. So perfect. That is our number. The number is 29 8 50 that is cogs for the month of july so that's the answer right there, 29 8 50. That's what we solved for. Cool. So there you go. You can see how the T account how the base equation, they're all sort of related, right? You just have to know where each piece of information fits in the puzzle. Cool. Let's go ahead and move on to the next video