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ellswortha
Level 1

Journal entry for periodic inventory when COGS is used for purchases

I understand the recommended method for periodic inventory is to post purchases to an asset account throughout the year and then debit COGS/credit the asset account for the difference between beginning and ending inventory value at the end of the year. My company actually posts all purchases to multiple COGS accounts (e.g. Resale Product Expense) and has multiple asset accounts (e.g., Resale Product Inventory) which are set up with Other Current Assets Detail Type instead of Inventory since our products are set up as Non-inventory. What journal entries should we make at the end of the year once physical inventory is valued? Thanks!

2 Comments 2
Rustler
Level 15

Journal entry for periodic inventory when COGS is used for purchases

Physical inventory is valued at cost, not market value. Then do a journal entry;
if the on hand value is less than the asset account, debit the asset account and credit COGS
otherwise
debit COGS and credit the asset account

Rainflurry
Level 12

Journal entry for periodic inventory when COGS is used for purchases

@ellswortha 

 

Yes, if using periodic inventory you should be posting all inventory purchases to a temporary 'Purchases' asset clearing account.  You should not post directly to COGS.  If you post directly to COGS, your interim financial statements will be inaccurate because your COGS is reflecting the amount of inventory purchased, not the amount of inventory sold.  When you take a physical inventory at year-end and make the adjusting journal entry, you will be accurate for the year only, but not any interim dates.

 

The proper way to use periodic inventory is to post all purchases to a 'Purchases' asset account or multiple purchases accounts, depending on the level of detail you desire.  At month-end (or however frequently), you will make the following entry:

 

Debit ending inventory amount (if estimate, you will back into COGS, see below)

Debit COGS (if estimate, you will back into ending inventory, see below)

Debit Purchase-Discounts (if you track it)

Credit Freight-In (if you track it separately)

Credit Purchases (to clear)

Credit beginning inventory

 

You will need to estimate either COGS (gross profit method) or ending inventory (retail inventory method) based on which you feel is more accurate.  That is the limitation of using periodic inventory.  I have a company that uses periodic inventory and has for almost 20 years so COGS is the better estimate and then we back into ending inventory.  If you have a way of getting a more accurate ending inventory than gross margin, go that route and back into COGS.

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