In a periodic inventory system, inventory-related accounts accumulate balances throughout the accounting period. Key accounts include purchases, purchase returns, purchase allowances, and purchase discounts. Unlike a perpetual system, where cost of goods sold (COGS) is tracked continuously, a periodic system calculates COGS at the end of the period. This calculation relies on a fundamental equation that incorporates the beginning inventory balance, purchases, and adjustments for discounts, returns, and COGS itself.
The process begins with the beginning inventory balance, to which total purchases are added. Subsequently, purchase discounts and returns are subtracted, along with the COGS, to arrive at the ending inventory balance. This method emphasizes the importance of conducting a physical inventory count at the end of the period to determine the actual ending inventory value.
For example, if the beginning inventory is $55,000 and purchases during the month total $25,000, the next step involves subtracting any purchase discounts (e.g., $650) and returns (e.g., $1,500). This results in a subtotal of $77,850. To find COGS, the ending inventory balance (e.g., $48,000) is subtracted from this subtotal, leading to a COGS of $29,850 for the month. This calculation illustrates how all components interact within the inventory T-account framework, reinforcing the relationship between the various elements of inventory management.
In summary, understanding the periodic inventory system involves recognizing how to aggregate and adjust inventory-related accounts to accurately determine COGS at the end of the accounting period, highlighting the necessity of a physical count and the integration of various inventory transactions.