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10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method

Periodic Inventory System​

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

Cost of Goods Sold Formula (Periodic)​

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

Components:

  • Beginning Inventory: Inventory on hand at start of period
  • Purchases: Goods purchased during period
  • Ending Inventory: Inventory on hand at end of period (from physical count)

Calculating Ending Inventory (Periodic)​

Steps:

  1. Take physical inventory count at period end
  2. Determine cost of each item (using cost flow assumption)
  3. Calculate total ending inventory value

Example: FIFO with Periodic System​

Information:

  • Beginning Inventory (Jan 1): 100 units @ €10 = €1,000
  • Purchases:
    • Jan 10: 150 units @ €12 = €1,800
    • Jan 20: 200 units @ €14 = €2,800
  • Physical Count (Jan 31): 180 units on hand

FIFO Cost Assignment:

  • Oldest costs are in COGS, newest costs in ending inventory
  • Ending Inventory (180 units): Most recent purchases
    • 180 units @ €14 = €2,520 (from Jan 20 purchase)

Cost of Goods Sold Calculation:

  • Beginning Inventory: €1,000
  • Purchases: €1,800 + €2,800 = €4,600
  • Goods Available: €1,000 + €4,600 = €5,600
  • Ending Inventory: €2,520
  • Cost of Goods Sold: €5,600 - €2,520 = €3,080

Verification:

  • Units sold: 100 + 150 + 200 - 180 = 270 units
  • COGS: 100 @ €10 + 150 @ €12 + 20 @ €14 = €1,000 + €1,800 + €280 = €3,080 ✓

Example: Weighted Average with Periodic System​

Same Information:

  • Beginning Inventory: 100 units @ €10 = €1,000
  • Purchases:
    • Jan 10: 150 units @ €12 = €1,800
    • Jan 20: 200 units @ €14 = €2,800
  • Total Available: 450 units @ €12.44 average = €5,600
  • Physical Count: 180 units

Weighted Average Cost:

  • Total Cost: €5,600
  • Total Units: 450
  • Average Cost: €5,600 ÷ 450 = €12.44 per unit

Cost Assignment:

  • Ending Inventory: 180 units @ €12.44 = €2,239
  • Cost of Goods Sold: 270 units @ €12.44 = €3,361

Verification:

  • COGS + Ending = €3,361 + €2,239 = €5,600 ✓

Adjusting Entries (Periodic)​

At Period End:

Step 1: Transfer Beginning Inventory and Purchases to COGS

602000 Cost of Goods Sold          €5,600
321000 Inventory (Beginning)                   €1,000
602000 Purchases                                 €4,600
To transfer beginning inventory and purchases to COGS

Step 2: Record Ending Inventory

321000 Inventory (Ending)          €2,520
602000 Cost of Goods Sold                      €2,520
To record ending inventory (FIFO example)

Result:

  • Cost of Goods Sold: €5,600 - €2,520 = €3,080
  • Inventory: €2,520

Luxembourg Considerations​

Periodic System:

  • Less common in modern businesses
  • Still used by some small businesses
  • Requires physical count at period end
  • Must use consistent cost flow assumption

Luxembourg Compliance Note​

For periodic inventory in Luxembourg:

  • Must use consistent valuation method (FIFO or weighted average)
  • Must conduct physical count
  • Must properly value ending inventory
  • Must calculate cost of goods sold accurately
  • Must comply with PCN Class 3 requirements
  • Must maintain proper documentation

Think It Through​

Why does the periodic system require a physical inventory count? What would happen if the count was inaccurate?