Q. Illustrate Periodic inventory procedure?
Companies by means of periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Therefore these companies have no up-to-date balance beside which to compare the physical inventory count at the end of the period. As well these companies make no attempt to determine the cost of goods sold at the time of each sale. In its place they compute the cost of all the goods sold during the accounting period at the end of the period. To conclude the cost of goods sold a company have to know
- Starting inventory cost of goods on hand at the beginning of the period.
- Net cost of purchases throughout the period.
- Ending inventory cost of unsold goods by the end of the period.
The company would demonstrate this information as follows
Beginning inventory $ 34,000
Add: Net cost of purchases during the period 140,000
Cost of goods available for sale during the period $174,000
Deduct: Ending inventory 20,000
Cost of goods sold during the period $154,000
In this schedule notice that the company start the accounting period with USD 34000 of merchandise and purchased an additional USD 140000 making a total of USD 174000 of goods that could have been sold during the period. After that a physical inventory showed that USD 20000 remained unsold which implies that USD 154000 was the cost of goods sold during the period. Obviously the USD 154000 isn't necessarily the precise amount of goods sold because no actual record was made of the dollar cost of the goods sold. Periodic inventory procedure essentially assumes that everything not on hand at the end of the period has been sold. This method ignores problems such as breakage or theft because the Merchandise Inventory account contains no up-to-date balance at the end of the accounting period against which to compare the physical count.