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

@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.

Hey there. So you've kind of landed in a common sitch with juggling periodic inventory in quickBooks. Posting purchases to lots of COGS acounts rather than an inventory asset one happens a lot and isn't really wrong. Just gotta make sure it all mashes up at year's end.

You've been hitting the COGS account all year. At year's end, after you value the physical stock, ya need to adjust these COGS accounts. Here's a simple way to handle it: First, figure out the ending inventory value. Then debit COGS and credit inventory assets like your "Resale Product Inventory" account for ending inventory's value. This kind of shifts the unsold stock value off the P&L and onto the balance sheet, matching up with the physical count. If your ending inventory value's actually down, you'd go the other way - credit COGS, debit inventory.

Look, it can be tricky aligning this adjustment with what's in stock - it's sort of a reverse from if you were capitalizing purchases to inventory all year. But this way you make sure your financials match the actual stock on hand. Hope that clears it up!

I get what you're saying, and yeah, it's a bit of a tricky spot you're in. When using multiple COGS accounts over time, you kinda bypass the usual periodic inventory process. So, when you hit year-end after counting physical inventory, you’ll hav' to tweak things a bit.

Start by finding the ending inventory value base on the physical count. Subtract this from what you had at the start to get to the real COGS. Then, you gotta fix your books up. Credit those current asset accounts (usually the ones logged as Other Current Assets) using the ending inventory's value. If needed, debit with the starting purchase values to match 'em up to the real inventory value. This will give you your actual COGS for the year in those COGS accounts.

If your COGS accounts have been racking up, you'll likely want to give them a massive adjustment. Credit current asset accounts to align with real inventory, and debit COGS to make things right - with adjustments bringing purchases and actual use together. It can be tiresome, especially if you've got loads of accounts. If it still feels overwhelming, maybe ask an accountant just to be on the safe side.