Under periodic inventory system inventory account is not updated for each purchase and each sale. All purchases are debited to purchases account. At the end of the period, the total in purchases account is added to the beginning balance of the inventory to compute cost of goods available for sale. The ending inventory is determined at the end of the period by a physical count and subtracted from
the cost of goods available for sale to compute the cost of goods sold. The general formula to compute cost of goods sold under periodic inventory system is given below: Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory The following information belongs to John company, a retailer of high-end fashion products:
Required: Compute cost of goods sold for the year 2016 assuming the company uses a periodic inventory system. Solution:Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory Journal entries in a periodic inventory system:(1). When goods are purchased from supplier:  (2) When expenses are incurred to obtain goods for sale – freight-in, insurance etc: (3). When goods are returned to supplier: (4). When payment is made to supplier: (5). When goods are sold to customers: (6). When goods are returned by customers: (7). When cash is collected from customers: (8). At the end of the period: Example:The following information belongs to Paradise Hardware Store: Beginning inventory: 200 units at $12 = $2,400 Required: Make journal entries to record above transactions assuming a periodic inventory system is used by Paradise Hardware Store. Solution:* (21,600 + 2,400) – 9,600 Periodic inventory system is usually used by companies that buy and sell a wide variety of inexpensive products. A disadvantage of periodic inventory system is that overages and shortages of inventory are buried in cost of goods sold because no accounting record is available against which to compare physical count of inventory. More from Inventory costing methods (explanations): How do you account for freight on inventory?What is the journal entry to record freight-in? Freight-in is capitalized onto the balance sheet since it's considered a production cost. Therefore, when freight-in is incurred, the company would debit inventory (freight-in) and credit cash (cash outflow to pay the expense).
How do you record freight costs in the periodic table?The freight-in journal entry can be made using the periodic inventory system by debiting the freight-in account and crediting the cash account. Like the purchase account, the freight-in account is a temporary account that will be cleared when the firm calculates the cost of goods after the accounting period.
Do you include freight out in inventory?Freight Out
Once a business has goods in its possession, it can't include any further freight charges in inventory cost. For example, if a company ships goods among its stores, the costs of doing so can't be included in inventory.
What is the account used to record freight on purchases in a periodic inventory?The account called Purchases is only used with the periodic inventory system. It is a temporary account used in the periodic inventory system to record the purchases of merchandise for resale. This account reports the gross amount of purchases of merchandise.
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