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7.3: Methods Under a Periodic Inventory System

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    26218
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    The good news for you is the inventory valuation methods under FIFO, LIFO, weighted average (or average cost), and specific identification are calculated basically the same under the periodic and perpetual inventory systems! The bad news is the periodic method does do things just a little differently.

    • Perpetual inventory: Calculates cost of good sold for each sales and records a journal entry for cost of goods sold with each sales transaction.
    • Periodic inventory: Follows the same basic principle but it calculates ONE cost of goods sold amount at the end of the month for all items based on the beginning inventory + all purchases and does not record cost of goods sold with each sales transaction.

    The data we have been working with from the videos in the previous section is:

    Units Cost Amount
    Jan 1 Beg Inventory 300 10 $3,000
    Jan 2 Purchase 200 15 $3,000
    Jan 11 Purchase 100 17 $1,700
    Jan 18 Purchase 300 20 $6,000
    Total Purchases 900 $13,700
    Units Sales Price Sales Amount
    Jan 8 Sales 300 30 $9,000
    Jan 15 Sale 250 40 $10,000
    Total Sales 550 $19,000

    FIFO Method

    Under the FIFO Method, we use the oldest inventory first and work our way forward until the sales are complete. Under the periodic inventory, cost of goods sold is assigned at the end of the period only and not with each sales transaction. There were a total of 55o units sold (remember, price doesn’t have anything to do with cost) and we will assign cost as follows:

    Units Cost Amount
    Jan 1 Beg Inventory 300 10 $3,000
    Jan 2 Purchase 200 15 $3,000
    Jan 11 Purchase 50 17 $850
    Total cost of goods sold 550 $6,850
    Jan 11 Purchase 50 17 $850
    Jan 18 Purchase 300 20 $6,000
    Ending Inventory 350 $6,850

    The journal entries under the periodic inventory method using FIFO would be (see how cost of good sold is recorded once at the end of the period, in this case end of the month):

    Date Account Debit Credit
    Jan 2 Merchandise Inventory 3,000
    Accounts Payable 3,000
    Jan 8 Accounts Receivable 9,000
    Sales 9,000
    Jan 11 Merchandise Inventory 1,700
    Accounts Payable 1,700
    Jan 15 Accounts Receivable 10,000
    Sales 10,000
    Jan 18 Merchandise Inventory 6,000
    Accounts Payable 6,000
    Jan 31 Cost of goods sold 6,850
    Merchandise Inventory 6,850

    LIFO Method

    Under the LIFO Method, cost of goods sold is calculated using the most recent inventory first and then working our way backwards until the sales order has been filled.

    Units Cost Amount
    Jan 18 Purchase 300 20 $6,000
    Jan 11 Purchase 100 17 $1,700
    Jan 2 Purchase 150 15 $2,250
    Total cost of goods sold 550 $9,950
    Jan 1 Beg Inventory 300 10 $3,000
    Jan 2 Purchase 50 15 $750
    Ending Inventory 350 $3,750

    The journal entries under FIFO would be the same but the entry to cost of goods sold and merchandise inventory done on January 31 and would be:

    Jan 31 Cost of goods sold 9,950
    Merchandise Inventory 9,950

    Weighted Average (or Average Cost)

    Watch this video from Note Pirate to understand the periodic inventory method using average cost:

    Using the information from the video, average cost was calculated as total value of beginning inventory and purchase $13,700 /900 total units in beginning inventory and purchased to get $15.22. This average cost can then be applied to the 550 units in sales during January and would be calculated as 550 units x $15.22 with the following journal entry (all other entries presented under FIFO would be the same):

    Jan 31 Cost of goods sold 8,371
    Merchandise Inventory 8,371

    Specific Identification

    Since the specific identification method, identifies exactly which cost the purchase comes from it does not change under perpetual or periodic. The only thing that changes is the timing of the entry. Under the perpetual method, cost of goods sold is calculated and recorded with every sale. Under the periodic inventory method, cost of goods sold is calculated at the end of the period only and recorded in one entry.

    A Open Assessments element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llfinancialaccounting/?p=142

    All rights reserved content
    • Prepare the Average Cost Method for a Perpetual Inventory System. Authored by: Note Pirate. Located at: youtu.be/7oNqWQhK3b8. License: All Rights Reserved. License Terms: Standard YouTube License

    7.3: Methods Under a Periodic Inventory System is shared under a CC BY license and was authored, remixed, and/or curated by LibreTexts.

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