Periodic Inventory System - Year-end Transactions

This post looks at the year-end transactions under the Periodic inventory system. Click here for the regular transactions that occur during the year.

Year-end Transactions

Some new accounts

There are some new accounts under the periodic system that do not exist under the perpetual system. We have already seen the first two when handling the transactions that take place during the year. These new accounts are:

• Trading Stock or Trading Inventory
• Purchases
• Carriage on Purchases
• Opening Stock
• Closing Stock

In the list of new accounts, I've included Trading Stock. I prefer the name "Trading Inventory" because it makes it clear that this is a different account to the "usual" Trading Stock account, but some textbooks use the same name. The important thing is that you know that Trading Stock under the perpetual inventory system and Trading Stock under the periodic inventory system are very different.

Note that there is no Cost of Sales account under the periodic inventory system!

The beginning of the year: Opening Stock

It turns out that before we look at the end of the year, it's useful to look at what happen right at the very beginning. At the start of the year, the business has trading stock on hand. This is shown in the balance brought down in the Trading Inventory account. The first thing we do at the start of the year is to close off Trading Inventory to the Opening Stock account. At this point, it means that trading stock is now entirely in the nominal accounts of the business, and that there is no reflection of trading stock as an asset.

This first transaction looks like this:

Closing off Opening Stock at the start of the year.

Note that Opening Stock is an expense.

The end of the year: Closing Stock

At the end of the year, a stock-taking will be done. This will reveal the actual value of the stock on hand in the business. This amount is placed into the Trading Inventory account and its contra-account is Closing Stock.

Calculating Cost of Sales

Under the Perpetual Inventory System, we close off Sales and Cost of Sales to the Trading Account. Under the the Periodic Inventory System, we don't have a Cost of Sales account, but we do have to calculate Cost of Sales. As you should have seen elsewhere, we can calculate Cost of Sales using a formula:

Cost of Sales = Opening Stock + Net Purchases + Carriage on Purchases - Closing Stock

It turns out that this formula applies in the General Ledger as well, and we get to it by closing off Opening Stock, (Net) Purchases, Carriage on Purchases, and Closing Stock to the Trading Account.

Sales

Sales is treated the same way under both inventory systems. We first close Debtors' Allowances off to Sales, and then close Sales off to the Trading Account.

<<<>>>

Opening Stock

This is closed off the Trading Account:
<<<>>>

Net Purchases

Some textbooks create a separate account called Creditors' Allowances. If you have done this, you must first close it off to Purchases. Then we close Purchases off to Trading Account:

<<<>>>

Carriage on Purchases

This also gets closed off to the Trading Account:

<<<>>>

Closing Stock

This also gets closed off to the Trading Account. Note that it will appear on the credit side: