What is the account to be debited when purchasing inventories using periodic inventory systems?

Periodic inventory system updates inventory balance once in a period. We discussed this concept in the perpetual-periodic inventory comparison. Here, we will learn the typical journal entries under a periodic inventory system.

Let us assume that all sales and purchases are on credit. Also assume that where discounts are provided or availed on sales/purchases, they are recorded using the gross method [to learn more about gross method, see discount on sales and discount on inventory purchases].

Following are the typical journal entries under a periodic inventory system:

Inventory Purchase:
The purchase of inventory is recorded by debiting purchases account and crediting accounts payable.

Purchase Discount:
Under gross method, purchase discount is recorded using the following journal entry:

Note: The above two journal entries are usually combined in a single entry which is shown below:

Purchase Return:
Purchase returns are recorded as shown below

Inventory Sale:
Unlike perpetual inventory system, the periodic inventory system records the transaction of sale via a single journal entry:

Sales Discounts:
A sales discount is recorded as shown below:

Again, the above two entries are combined in a period inventory system as shown below:

Sales Return:
Similarly, sale returns are also recorded via a single journal entry:

At the end of each accounting period, the value of ending inventory is determined by physical count. Cost of goods sold is determined either as a balancing figure in the closing entry shown at the end or by using the following formula:

COGS = Beginning Inventory + Purchases − Ending Inventory

The closing entry required in a periodic inventory system debits:

• inventory account by the value of ending inventory
• cost of goods sold account by the value as determined above or by the balancing figure

and credits:

• inventory account by beginning inventory
• purchases account

The entry is shown below:

A simplified form of the above journal entry uses a single debit or credit to inventory account by calculating the difference of ending inventory and beginning inventory. If the difference is positive, the inventory account will be debited for the difference and if it the difference is negative, the journal entry will credit the inventory account by the difference.

by Irfanullah Jan, ACCA and last modified on Mar 18, 2019

Purchases Account Under the Periodic Inventory System

The general ledger account Purchases is used to record the purchases of inventory items under the periodic inventory system. Under the periodic system the account Inventory will have no entries until it is adjusted at the end of the accounting year so that it reports the cost of the ending inventory.

Under the periodic system, the cost in the account Purchases will be added to the cost of the beginning inventory to arrive at the cost of goods available. The cost of the ending inventory is computed through a physical count [or an estimate] and is subtracted from the cost of goods available to arrive at the cost of goods sold.

Inventory Account Under the Perpetual Inventory System

The account Purchases is nonexistent with the perpetual inventory system. Under the perpetual inventory system, the cost of inventory items purchased are recorded directly into the account Inventory.

Under the perpetual system, the costs of the goods sold are removed from the account Inventory when the goods are sold and are recorded in the account Cost of Goods Sold. As a result, the balance in the account Inventory should be the cost of the ending inventory.