Periodic Inventory System - Transactions during the year

This post is suitable for Grades 11 and 12. It looks only at transactions during the year. For year-end transactions for the periodic inventory system, look elsewhere.

Periodic Inventory System: Regular transactions

Under the periodic inventory system, changes to trading stock are only recorded periodically (hence the name!).

When trading stock is purchased, this is recorded in an expense account called Purchases. When trading stock is sold, no adjustment is made to Trading Stock -- only Bank or Debtors' Control and Sale are affected. This means that there is no Cost of Sales. If you are only used to the perpetual system, this way of doing things may be strange, but it is much easier when we sell stock.

Another big difference under the periodic system is the way that carriage on purchases is dealt with. A separate expense account called Carriage on Purchases is created and used every time that the business incurs carriage costs.

Note that both Purchases and Carriage on Purchases do not appear when using the Perpetual Inventory System. Similarly, there is not Cost of Sales account when using the Periodic Inventory System.

Purchasing Trading Stock

As mentioned above, every time we record a purchase of Trading Stock, we record it into an expense account called Purchases. When it comes to buying stock, this account behaves similarly to accounts like Stationery Expense or Consumable Stores.

For example, during the month of January, the business buys R14 500 of stock on credit, and pays cash for another R9 700 of goods. It will be recorded in the general ledger as follows:

Carriage on Purchases

Carriage on purchases is recorded in a separate expense account called Carriage on Purchases. Suppose that the business pays cash for carriage on purchases of R1 500. The accounts in the general ledger would look like this:

Note that Carriage on Purchases could also be on credit, or be paid with Petty Cash.

Sales of Trading Stock

This is where things get easy. When we sell trading stock, we don't record Cost of Sales. This means that there is no affect on Purchases or any Trading Stock account. For example, if merchandise was sold for R30 000, we would record it as follows:

Notice how the Purchases account remains unaffected!

Returns by Customers

When customers return goods to us, we only have to adjust Debtors' Control (because they owe us less) and Debtors' Allowances (to represent the cancelled Sales). Since no stock values were adjusted when the goods were sold, we don't have to adjust stock when there is a return. For example, if a debtor returned stock that was sold for R1 500, it would look like this in the General Ledger:

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Notice how the Purchases account remains unaffected!

Returns to Suppliers

If we return goods to suppliers, there are two possible ways of recording this transaction, although the end result is the same. I will only examine one of the ways here. If we return goods to a supplier, we will debit Creditors' Control, as we owe them less, and we credit Purchases to "cancel" the original purchases expense. For example, if we return stock that we paid R900 for, we would record it in the general ledger as follows:

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Donations of Stock

If we donate goods to someone, we decrease the purchases account directly. This means that we will debit Donations, as it is an expense, and we will credit Purchases. For example, if we donate R350 of stock to the SPCA, it will be recorded in the General Ledger as follows:

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Drawings of Stock

If the owner of the business takes trading stock for personal use, Drawings is debited and Purchases is credited. For example, if the owner withdraws R160 of stock for his own use, we record it in the General Ledger as follows:

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These transactions are all ones that occur during the course of the year. For the year-end transactions, please see the post on the year-end transactions for the periodic inventory system.