Skip to main content

6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System

Periodic Inventory System Overview​

The periodic inventory system updates inventory records only at period end. During the period, purchases are recorded in a Purchases account, and cost of goods sold is calculated at period end.

Key Differences from Perpetual​

Perpetual System:

  • Inventory updated with each purchase
  • Cost of goods sold recorded at each sale
  • Inventory balance always current

Periodic System:

  • Purchases recorded in Purchases account
  • No cost of goods sold at sale time
  • Cost of goods sold calculated at period end
  • Requires physical inventory count

Recording Purchases (Periodic System)​

Transaction: Purchase merchandise on credit

Example: Purchase €5,000 merchandise (excluding VAT), VAT 17%, recoverable.

Journal Entry:

602000 Purchases (Class 6)         €5,000
431000 VAT Recoverable              850
400000 Accounts Payable                        €5,850
To record purchase of merchandise (periodic system)

Key Difference: Uses "Purchases" account (602000) instead of "Inventory" account.

PCN Account:

  • 602000: Purchases of Merchandise (Class 6 - Expense account in periodic system)

Recording Sales (Periodic System)​

Transaction: Sell merchandise

Example: Sell €1,000 merchandise for cash (excluding VAT), VAT 17%.

Journal Entry:

510000 Cash                       €1,170
700000 Sales Revenue                          €1,000
430000 VAT Payable                              €170
To record sale of merchandise (periodic system)

Key Difference: No cost of goods sold entry at sale time. Cost is calculated at period end.

Calculating Cost of Goods Sold (Periodic System)​

Formula: Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Steps:

  1. Take beginning inventory (from previous period)
  2. Add purchases during period
  3. Subtract ending inventory (from physical count)
  4. Result is cost of goods sold

Example:

  • Beginning Inventory: €10,000
  • Purchases: €30,000
  • Ending Inventory (physical count): €12,000
  • Cost of Goods Sold: €10,000 + €30,000 - €12,000 = €28,000

Adjusting Entry at Period End:

602000 Cost of Goods Sold          €28,000
321000 Inventory (beginning)                   €10,000
602000 Purchases                                 €30,000
321000 Inventory (ending)                        €12,000
To calculate and record cost of goods sold

Or, simpler approach:

602000 Cost of Goods Sold          €28,000
321000 Inventory (beginning)                   €10,000
602000 Purchases                                 €30,000
321000 Inventory (ending)                        €12,000

Actually, the proper periodic closing entries are:

Step 1: Transfer Beginning Inventory and Purchases to COGS

602000 Cost of Goods Sold          €40,000
321000 Inventory (beginning)                   €10,000
602000 Purchases                                 €30,000

Step 2: Record Ending Inventory

321000 Inventory (ending)          €12,000
602000 Cost of Goods Sold                      €12,000

Result: Cost of Goods Sold = €40,000 - €12,000 = €28,000

Physical Inventory Count​

Required for Periodic System:

  • Must count all inventory at period end
  • Count determines ending inventory value
  • Used to calculate cost of goods sold
  • Must be accurate

Process:

  1. Count all inventory items
  2. Value each item (at cost)
  3. Calculate total ending inventory
  4. Use in cost of goods sold calculation

Advantages and Disadvantages​

Periodic System Advantages:

  • Simpler during the period
  • Less detailed record-keeping
  • Suitable for small businesses
  • Lower cost

Periodic System Disadvantages:

  • Don't know inventory levels during period
  • Cost of goods sold only at period end
  • Requires physical count
  • Less inventory control
  • Harder to detect theft

Luxembourg Context​

Use of Periodic System:

  • Less common in Luxembourg
  • Mainly very small businesses
  • Businesses with simple operations
  • Manual accounting systems

Luxembourg Recommendation: Use perpetual system for most businesses due to:

  • VAT compliance needs
  • Better inventory control
  • Multiple VAT rates
  • Modern accounting systems

Luxembourg Compliance Note​

If using periodic system in Luxembourg:

  • Must still follow PCN classifications
  • Must properly value inventory
  • Must calculate cost of goods sold accurately
  • Physical counts must be documented
  • Must comply with VAT requirements
  • Must file accurate financial statements