Methods Under a Periodic Inventory System

The good news for you is the inventory valuation methods under FIFO, LIFO, weighted average (or average cost), and specific identification are calculated basically the same under the periodic and perpetual inventory systems! The bad news is the periodic method does do things just a little differently.

  • Perpetual inventory: Calculates cost of good sold for each sales and records a journal entry for cost of goods sold with each sales transaction.
  • Periodic inventory: Follows the same basic principle but it calculates ONE cost of goods sold amount at the end of the month for all items based on the beginning inventory + all purchases and does not record cost of goods sold with each sales transaction.

The data we have been working with from the videos in the previous section is:

Units Cost Amount
Jan 1 Beg Inventory 300 10 $3,000
Jan 2 Purchase 200 15 $3,000
Jan 11 Purchase 100 17 $1,700
Jan 18 Purchase 300 20 $6,000
Total Purchases 900 $13,700
Units Sales Price Sales Amount
Jan 8 Sales 300 30 $9,000
Jan 15 Sale 250 40 $10,000
Total Sales 550 $19,000

 

FIFO Method

Under the FIFO Method, we use the oldest inventory first and work our way forward until the sales are complete. Under the periodic inventory, cost of goods sold is assigned at the end of the period only and not with each sales transaction. There were a total of 55o units sold (remember, price doesn’t have anything to do with cost) and we will assign cost as follows:

Units Cost Amount
Jan 1 Beg Inventory 300 10 $3,000
Jan 2 Purchase 200 15 $3,000
Jan 11 Purchase 50 17 $850
Total cost of goods sold 550 $6,850
Jan 11 Purchase 50 17 $850
Jan 18 Purchase 300 20 $6,000
Ending Inventory 350 $6,850

The journal entries under the periodic inventory method using FIFO would be (see how cost of good sold is recorded once at the end of the period, in this case end of the month):

Date Account Debit Credit
Jan 2 Merchandise Inventory 3,000
Accounts Payable 3,000
Jan 8 Accounts Receivable 9,000
Sales 9,000
Jan 11 Merchandise Inventory 1,700
Accounts Payable 1,700
Jan 15 Accounts Receivable 10,000
Sales 10,000
Jan 18 Merchandise Inventory 6,000
Accounts Payable 6,000
Jan 31 Cost of goods sold 6,850
Merchandise Inventory 6,850

LIFO Method

Under the LIFO Method, cost of goods sold is calculated using the most recent inventory first and then working our way backwards until the sales order has been filled.

Units Cost Amount
Jan 18 Purchase 300 20 $6,000
Jan 11 Purchase 100 17 $1,700
Jan 2 Purchase 150 15 $2,250
Total cost of goods sold 550 $9,950
Jan 1 Beg Inventory 300 10 $3,000
Jan 2 Purchase 50 15 $750
Ending Inventory 350 $3,750

The journal entries under FIFO would be the same but the entry to cost of goods sold and merchandise inventory done on January 31 and would be:

Jan 31 Cost of goods sold 9,950
Merchandise Inventory 9,950

Weighted Average (or Average Cost)

Watch this video from Note Pirate to understand the periodic inventory method using average cost:

Using the information from the video, average cost was calculated as total value of beginning inventory and purchase $13,700 /900 total units in beginning inventory and purchased to get $15.22. This average cost can then be applied to the 550 units in sales during January and would be calculated as 550 units x $15.22 with the following journal entry (all other entries presented under FIFO would be the same):

Jan 31 Cost of goods sold 8,371
Merchandise Inventory 8,371

Specific Identification

Since the specific identification method, identifies exactly which cost the purchase comes from it does not change under perpetual or periodic. The only thing that changes is the timing of the entry. Under the perpetual method, cost of goods sold is calculated and recorded with every sale. Under the periodic inventory method, cost of goods sold is calculated at the end of the period only and recorded in one entry.