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Periodic Inventory System

We have been working with the perpetual inventory system, which is common for large merchants. However, there are many merchants that cannot afford the digital system and software required to use the perpetual system. These merchants rely on the periodic system, which involves the periodic counting of inventory to determine what has been sold during the prior accounting period.

Although this system requires a manual counting of inventory, the merchant must still determine which inventory flow system is going to be used: FIFO, LIFO, or average cost? The reasons for choosing the method of inventory flow do not change, but the calculation is made differently:

At the time of sale, there is no record of COGS or decrease in merchandise inventory.
At the end of the year, calculations are made to determine the COGS and inventory balance.

The first calculation determines the total inventory that was available to be sold during the year.

Start with the following:

inventory at beginning of the year

+ all purchases made during the year

+ all costs attributable to purchases

- returns

- purchase discounts

- purchase allowances

= cost of goods available for sale (This is what you have paid for inventory that could have been sold.)

The next calculation determines how much has been sold:

cost of goods available for sale

- inventory at the end of year (This is the cost of the inventory that has been counted.)

$= COGS (This is the cost of the inventory that was actually sold.)$

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