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:
9,950
Jan 31 | Cost of goods sold | 9,950 |
Merchandise Inventory |
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):
8,371
Jan 31 | Cost of goods sold | 8,371 |
Merchandise Inventory |
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.
Candela Citations
- Prepare the Average Cost Method for a Perpetual Inventory System. Authored by: Note Pirate. Located at: https://youtu.be/7oNqWQhK3b8. License: All Rights Reserved. License Terms: Standard YouTube License