Mark Farber: Hi.
I'm Mark Farber, and this is Accounting Fundamentals.
In our last video, we started to look at merchandising, operations, and inventory, and we looked at
how we would account for inventory, using a perpetual inventory system.
In this video, we're going to look at a periodic inventory system.
The difference is that in a periodic inventory system, we're not going to update our inventory
but for at the end of each period, so whereas in the perpetual system, as we purchased inventory,
we updated the inventory account, and every time we sold stuff, we updated the inventory
account, in a periodic system, you don't do that.
You leave the inventory count for the entire accounting period, and then you make all your
updates at the end of the period.
I've got the same transactions here.
Let's take a look at how this would look.
Using a periodic system, on February 3rd, and I'm going to try and squeeze these in,
because I'm going to need a little extra space.
On February 3rd, rather than taking the $6,000, 1,000 units and $6 a unit, rather than putting
that into inventory, what we're going to do is we're going to debit an account called
"Purchases," and I'm just going to call it, "Purch," but that's short for purchases, and
that's $6,000.
We're going to credit accounts payable, same as we did before.
Okay, so no update to the inventory account yet, and that covers the purchase.
Now, when we sell our units on February 7th, we're going to have the exact same sales transaction.
That part never changes, so it's 100 units at $10 a piece, so we're going to debit accounts
receivable $1,000, and credit sales $1,000.
That's it.
We don't do that second part of the transaction with cost of goods sold and inventory, because
again, we're not updating the inventory account until the end of the period.
Now we get to the next one, February 14th, and it's the same thing.
We're going to debit accounts receivable.
20 units at $12 a unit is $240.
We're going to credit sales, and then we have another purchase to make on February 22nd.
We're going to debit purchases 500 times six, $3,000, and credit accounts payable.
Now we're at the end of the period, and now we have to go through a process of counting
our inventory, and regardless of if you use a perpetual system or a periodic system, you
always have to count your inventory at the end of each period, in order to confirm that
the amount that you have in your books, if it's a perpetual system, matches what you
physically have on hand, or in a periodic system, you need that number in order to figure
out what your cost of goods sold is.
We're going to go through the process of accounting our inventory, and if we assume that this
company started the year with no inventory, this was the first inventory that it purchased,
then we can see that they purchased 1,000 units.
They purchased 500 units over here, so they would have had 1,500 units, and then they
sold 120 units, so 1,380, 1,380 units left at the end of the year.
In their count, and let's just put that over here, they're going to count 1,380 units,
and 1,380 units at $6 a unit, and let me just grab my piece of paper here, that's going
to equal $8,280.
And that's 1,380 times $6 a unit.
We know a few things now.
We know that our opening inventory, we'll call "Beginning inventory," was zero.
That's our assumption here, that there was no inventory on hand.
Our ending inventory is that number there, 8,280.
Again, they determine that by counting the number of units on hand at the end of the
period, multiplying by the price they paid, $6 a unit, and they get that.
Then, they also know that purchases amounted to 1,000 and 500, or in dollar terms, 6,000
and 3,000, so there was $9,000 of purchases during the period.
We know that my beginning inventory, plus my purchases, minus my ending inventory is
going to equal my cost of goods sold.
In other words, if I take everything I had at the beginning of the period, I add in all
the stuff that I purchased during the period, and then I subtract out whatever is left over
at the end of the period, the difference between that is what I sold.
It's kind of like what we did back when we looked at adjusting entries, and we looked
at supplies, and how we figure out how much supplies expense we had, or how much supplies
we used.
In fact, it's exactly the same process.
In this case, zero, plus my purchases of 9,000, minus my ending inventory of 8,280 gives me
a cost of goods sold figure of $720.
I'll just put it in here.
Let's just make a little box.
Now, what we have to do is we have to adjust our inventory account, so what we will do
is we will do two transactions.
First of all, we'll debit inventory $9,000.
That's for the purchases that we made during the period.
And we'll credit purchases $9,000.
We take all the purchases we made during the period, and at the end of the period, in one
transaction, we move all of those into inventory.
Then the second transaction we're going to do is we're going to debit cost of goods sold,
$720, the amount that we calculated is the cost of goods sold for the period, and we'll
credit inventory for that.
If you go through the process, and I'll leave that to you to go through this and do T accounts
for these transactions, as well as the ones from the previous video, you'll find with
get to the exact same place.
We have the same number of sales, we have the same cost of goods sold between these
transactions, and we have the same ending inventory.
The only difference is that in the case of the perpetual inventory system, we were keeping
track of it as we went, so at any point in the month, you could have looked at your inventory
account and determined how much inventory the company had.
In this case, we couldn't do that.
Our inventory account would have said zero for the entire month, in this particular case,
and only at the end of the month, when we did this calculation, and then did these two
adjusting entries, would we know how much inventory we have and what our cost of goods
sold is, and that's essentially the difference between a periodic system and a perpetual
system.