Periodic inventory transactions

Learning goals

• Journalize periodic purchases, freight-in, returns, and discounts.
• Journalize sales, customer returns, and sales discounts.
• Interpret credit terms such as 2/10, n/30.
• Explain why no COGS entry is made at each periodic sale.

Prerequisite check

State the formula for net purchases. Under a periodic system, which temporary accounts collect incoming inventory cost changes?

Vocabulary

• Purchase return: goods sent back to a supplier.
• Purchase allowance: supplier reduction when the buyer keeps unsatisfactory goods.
• Freight-in: transportation cost assigned to bringing resale goods to the buyer under the stated shipping terms.
• Purchase discount: reduction for prompt payment by the buyer.
• Sales return/allowance: reduction of sales for customer returns or allowances.
• Sales discount: reduction allowed for prompt customer payment.
• `2/10, n/30`: 2% discount if paid within 10 days; otherwise the net amount is due within 30 days, under the problem's convention.

Core idea

Periodic accounting postpones the continuous Inventory/COGS update. Purchases and related contra accounts collect the period's incoming-goods activity; a physical count and COGS schedule complete the record at period-end.

This lesson ignores sales tax so the inventory-system logic is visible. Lesson 4 adds HST.

Why this treatment makes sense

The periodic system is less detailed during the period. It records the selling side immediately but does not know the cost transferred on each sale unless separate cost records are maintained. That is why the period-end count is central.

A repeatable method

For purchases:

1. Invoice → debit Purchases.
2. Buyer freight under stated terms → debit Freight-in.
3. Return/allowance → credit Purchase Returns and Allowances.
4. Prompt-payment discount → credit Purchase Discounts.

For sales:

1. Sale → credit Sales.
2. Customer return/allowance → debit Sales Returns and Allowances.
3. Prompt-payment discount → debit Sales Discounts.
4. Do not record COGS at the sale in a periodic system.

Worked example

Pinecone Games uses a periodic system and has these tax-excluded transactions:

1. Purchase goods on account, $6,000, terms 2/10, n/30.
2. Pay $300 freight that the buyer is responsible for.
3. Return $800 of goods before payment.
4. Pay the remaining supplier balance within the discount period.
5. Sell goods on account for $9,000, terms 2/10, n/30.
6. Customer returns $600 of goods.
7. Customer pays within the discount period.

Entries:

Discount checks: supplier balance after return $5,200 × 2% = $104; customer balance after return $8,400 × 2% = $168. No entry records the cost of the sold or returned goods during the period.

Journal, ledger, and statement connection

Posting creates temporary purchase and sales accounts. The adjusted/period-end worksheet combines those balances with beginning and counted ending Inventory. The detailed income statement reports net sales, COGS, gross profit, operating expenses, and net income.

High-volume businesses may group recurring entries in special journals such as sales, purchases, cash receipts, and cash payments journals. Customer and supplier details may sit in subsidiary ledgers whose totals must agree with the Accounts Receivable and Accounts Payable control accounts in the general ledger. The grouping changes efficiency, not the debit-credit logic or evidence required.

Common mistakes

• Calculating a discount on the original invoice after a return.
• Taking a discount outside the stated period.
• Debiting Merchandise Inventory for a periodic purchase.
• Recording COGS at every periodic sale.
• Crediting Purchases for returns instead of using the required contra account.
• Mixing tax-inclusive and tax-exclusive amounts.

Guided practice

Using periodic accounting and ignoring tax:

1. Buy goods $4,500 on account, terms 1/10, n/30.
2. Return $500.
3. Pay in time for discount.
4. Sell goods $6,200 on account.
5. Allow the customer $200 for minor damage while the customer keeps the goods.

Independent practice

Journalize for Harbour Hobbies, periodic system, tax excluded:

• purchase $8,000, terms 3/10, n/30;
• pay buyer-responsible freight $420;
• receive $1,000 supplier allowance;
• pay within the discount period;
• sell $12,500 on account, terms 1/10, n/30;
• customer returns $500;
• collect within the discount period.

Self-check and solutions

Guided practice: Dr Purchases $4,500 / Cr A/P $4,500; Dr A/P $500 / Cr Purchase Returns $500; discount $4,000 × 1% = $40, so Dr A/P $4,000 / Cr Cash $3,960 / Cr Purchase Discounts $40; Dr A/R $6,200 / Cr Sales $6,200; Dr Sales Returns and Allowances $200 / Cr A/R $200. No COGS entry.

Independent practice: Purchase: Dr Purchases $8,000 / Cr A/P $8,000. Freight: Dr Freight-in $420 / Cr Cash $420. Allowance: Dr A/P $1,000 / Cr Purchase Returns and Allowances $1,000. Discount = $7,000 × 3% = $210; payment Dr A/P $7,000 / Cr Cash $6,790 / Cr Purchase Discounts $210. Sale Dr A/R $12,500 / Cr Sales $12,500. Return Dr Sales Returns $500 / Cr A/R $500. Customer discount = $12,000 × 1% = $120; collection Dr Cash $11,880 / Dr Sales Discounts $120 / Cr A/R $12,000.

Retrieval practice

From memory, list the four periodic purchase-side accounts and three sales-side accounts. Explain which side each normally uses.

Exam-style application

A periodic-system student records a $5,000 sale with Dr A/R $5,000 / Cr Sales $5,000 and Dr COGS $3,100 / Cr Inventory $3,100. Explain and correct.

Answer outline: The revenue entry is correct. The second entry belongs to a perpetual system, not the stated periodic system. Reverse it with Dr Inventory $3,100 / Cr COGS $3,100 if already posted. Periodic COGS will be determined from beginning inventory, net purchases, and the ending count.

Lesson summary

Periodic accounting uses temporary purchase accounts and delays the cost-of-sale entry. Read returns and discount terms carefully, then let the period-end count complete COGS.