P6 (App 5A): Periodic Sales | ACCOUNTING ESSENTIALS

🎯 Learning Objectives

Understand how sales are recorded in a periodic inventory system
Distinguish between perpetual and periodic sales recording
Explain why the cost entry is deferred until period-end
Calculate cost of goods sold using the periodic formula
Analyze the trade-offs between perpetual and periodic systems

📚 Background & Principles

In a periodic sales system, only the revenue side of each sale is recorded at the time of sale. The cost of goods sold and inventory reduction entries are deferred until year-end when physical inventory counts are performed.

Core Principle: The periodic system separates revenue recognition from cost recognition. Revenue is recorded immediately upon sale, but COGS is calculated at period-end using the formula: Beginning Inventory + Net Purchases + Freight-In - Ending Inventory.

This "half-story" approach simplifies daily transactions but delays cost information until year-end. The inventory reduction is captured through the physical count rather than individual transaction entries.

💡 Key Insight: Think of periodic sales as only recording the "happy" part of the transaction (we made money!) and deferring the "sad" part (we gave up inventory) until later. The year-end count tells the complete story.

🔑 Key Concepts

Revenue Entry Only

In periodic systems, sales generate only one entry: Debit Cash/AR, Credit Sales Revenue. The cost entry is deferred.

Deferred Cost Recognition

COGS is not recorded with each sale. Instead, it's calculated at period-end using beginning inventory, purchases, and ending inventory.

Physical Count Dependency

The periodic system relies entirely on year-end inventory counting to determine what was sold and what remains.

Hidden Shrinkage

Inventory theft, damage, or errors are included in COGS because they reduce ending inventory, inflating the cost figure.

Simplified Transactions

Daily sales recording is faster since only one entry per transaction is needed instead of two.

Delayed Financial Information

Gross profit and COGS are unknown until year-end physical count, limiting interim financial analysis.

🔍 Deep Dive

Explore periodic sales at different levels of depth:

🟢 Foundational Level

Understanding the "Half-Story" sale concept.

The Half-Story Sale

Analogy: The Lazy Cashier

Imagine a store where the cashier only records HOW MUCH customers pay, but doesn't track WHAT they bought or how much it cost.

At the Register (Periodic):

"That will be $100." → You charge their card and record the sale.

"What did they buy?" → You don't care. You don't record the inventory reduction.

At Year-End:

Someone counts the shelves. "We started with 500 items, now we have 400. So we sold 100."

Then they calculate: "Those 100 items cost us $600. Our profit was $10,000 - $600 = $9,400."

The Key Difference

Perpetual

2 Entries

Periodic

1 Entry

🟡 Standard Level

Journal entry comparison and system trade-offs.

Journal Entry Comparison

Scenario: Sold merchandise for $1,500 (cost $900) on credit.

🔄 Perpetual System

Entry 1: Revenue

Debit: Accounts Receivable $1,500
Credit: Sales Revenue $1,500

Entry 2: Cost (IMMEDIATE)

Debit: Cost of Goods Sold $900
Credit: Inventory $900

✓ Real-time COGS & Inventory

📅 Periodic System

Entry 1: Revenue

Debit: Accounts Receivable $1,500
Credit: Sales Revenue $1,500

Entry 2: Cost

NO ENTRY MADE NOW

⚠ Deferred until year-end

When Does the Cost Entry Happen?

In Periodic System:

The combined closing entry at year-end accounts for all sales, purchases, and inventory changes at once.

Debit: Cost of Goods Sold [Calculated]
Debit: Sales Returns & Allowances [Returns]
Debit: Sales Discounts [Discounts]
Credit: Purchases [Net Purchases]
Credit: Inventory (Ending) [Physical Count]
Credit: Sales Revenue [Total Sales]

🔴 Advanced Level

Complex analysis and system selection considerations.

COGS Calculation in Periodic System

Given: Beginning Inventory $20,000, Net Purchases $75,000, Freight-In $2,500, Ending Inventory $18,000

Beginning

$20,000

+

Net Purchases

$75,000

+

Freight

$2,500

−

Ending

$18,000

=

COGS

$79,500

Shrinkage Impact Analysis

Scenario: Beginning Inventory $25,000, Purchases $100,000, Physical Count Ending $22,000, but "Book" should be $24,000 (theft/loss of $2,000).

Calculated COGS:

Beginning + Purchases - Ending = $25,000 + $100,000 - $22,000 = $103,000

The "Hidden" Problem:

The $2,000 shrinkage is included in COGS as an expense, but it looks like normal cost of goods sold. Management may not realize there's a theft problem.

Perpetual System Would Show:

Real-time tracking would reveal the missing inventory BEFORE year-end, allowing investigation and prevention.

🎨 Interactive: Periodic COGS Calculator

Calculate cost of goods sold using the periodic system formula.

Beginning Inventory ($)

Net Purchases ($)

Freight-In ($)

Ending Inventory - Physical Count ($)

Cost of Goods Sold

$79,500

Available for Sale: $97,500 − Ending: $18,000

⚖️ Perpetual vs Periodic: Sales Comparison

✅ Periodic System Advantages

Simpler daily transactions (one entry per sale)
Lower implementation and maintenance costs
Less data entry burden during operations
Suitable for small businesses with manual systems
Works well for low-value or homogeneous inventory

⚠️ Periodic System Disadvantages

No real-time inventory information
COGS and gross profit unknown until year-end
Inventory shrinkage hidden in COGS figure
Delayed detection of theft or errors
Limited interim financial analysis capability

📊 Decision Framework: Choose periodic system if your business has: (1) low transaction volume, (2) low-value items, (3) manual accounting processes, or (4) limited technology resources. Choose perpetual system if you need: (1) real-time inventory tracking, (2) immediate COGS information, (3) theft detection, or (4) sophisticated inventory management.

🚫 Common Misconceptions & Professional Tips

❌ Misconception 1: "Periodic systems don't track inventory at all."

✅ Reality: Periodic systems DO track inventory—they just do it differently. Purchases are recorded, and physical counts determine ending inventory. COGS is calculated rather than accumulated transaction-by-transaction.

❌ Misconception 2: "Periodic systems don't record COGS."

✅ Reality: Periodic systems DO record COGS, but at year-end as a single summary entry, not as individual entries for each sale. The total COGS figure is calculated using the inventory equation.

❌ Misconception 3: "Periodic systems are always worse than perpetual."

✅ Reality: For small retailers, periodic systems may be more cost-effective. The "best" system depends on business needs, not technical superiority. Many businesses successfully use periodic systems for specific product lines.

💡 Professional Tip #1: Even in periodic systems, maintain a purchases journal to track all acquisitions. This aids in vendor analysis and audit preparation.

💡 Professional Tip #2: Conduct cycle counts (partial physical counts) throughout the year in periodic systems. While not used for financial statements, they help identify issues early.

💡 Professional Tip #3: Document your year-end inventory counting procedures thoroughly. Inconsistent counts between years or locations raise audit concerns.

🧠 Memory Aids & Quick Reference

⚡ Quick Recall: Periodic COGS Formula

COGS = Beginning + Net Purchases + Freight-In − Ending

Remember: Only ONE entry per sale (the revenue entry). The cost entry comes at year-end.

💵 Sales Entry

Dr: Cash/AR, Cr: Sales (recorded immediately)

📦 Cost Entry

Deferred until year-end physical count

🔢 COGS Calculation

Beginning + Purchases + Freight - Ending = COGS

⚠️ Shrinkage

Hidden in COGS as difference between book and physical

📖 Glossary

Periodic Inventory System

Inventory system where inventory is not updated continuously. Balance determined by physical count at period-end.

Revenue Recognition (Sales)

Recording the sale entry at time of transfer. In periodic: only the sales portion, not cost portion.

Cost Recognition Deferral

Postponing the COGS entry until year-end when inventory is physically counted.

Physical Inventory Count

Year-end process of counting actual inventory on hand to determine ending inventory balance.

Inventory Shrinkage

Difference between book inventory and physical count due to theft, damage, or errors.

Cost of Goods Available

Beginning Inventory + Net Purchases + Freight-In. Total cost of goods available for sale during period.

Deferred Cost Entry

The COGS and inventory adjustment entry made only at period-end in periodic systems.

System Trade-off

The balance between simplicity (periodic) and real-time information (perpetual) in inventory management.

Periodic Sales (App 5A)