3.2 Periodic vs Perpetual Inventory

3.2 Periodic vs Perpetual Inventory

Quick Answer: In a periodic system, merchandise bought is debited to Purchases (not Inventory), and Cost of Goods Sold is computed after physical inventory. In a perpetual system, purchases debit Inventory, and each sale triggers a second entry debiting Cost of Goods Sold and crediting Inventory. TESDA Bookkeeping NC III items often test whether you pick the account titles and COGS timing that match the method named in the problem.

Trading sole proprietorships—retailers and wholesalers who buy goods to resell—must track merchandise cost. Services businesses rarely face this choice; traders always do. Philippine classroom and assessment materials still emphasize the periodic method because it pairs cleanly with special journals (Purchases column in the Purchase Journal), but many computerized shops run perpetual inventory. You must journalize both correctly.

Trading Business Context

A trading firm’s operating cycle is: buy merchandise → hold as inventory → sell → collect cash. Gross profit equals net sales minus Cost of Goods Sold (COGS). How and when COGS hits the books depends on the inventory system—not on whether the sale was cash or credit.

Periodic System — Accounts and Flow

Under periodic inventory, the Inventory account often shows only the beginning balance until period-end worksheets or adjusting/closing procedures update it. Day-to-day buying uses:

• Purchases — debit for merchandise bought for resale
• Freight-In / Transportation-In — debit for inbound shipping on merchandise
• Purchase Returns and Allowances — credit when goods are returned or price is reduced
• Purchase Discounts — credit when cash discounts are taken (if a net-method alternative is not used)

Net purchases = Purchases + Freight-In − Purchase Returns and Allowances − Purchase Discounts.

COGS formula (periodic):

COGS = Beginning Inventory + Net Purchases − Ending Inventory

Ending inventory comes from the physical count valued at cost (specific identification, FIFO, weighted average—as taught in the program).

PHP worked example — periodic (Ana Reyes Trading)

Beginning inventory, March 1: ₱80,000
Credit purchase March 13 from Metro Supply: ₱60,000
Freight-In paid cash March 13: ₱2,000
Purchase return March 15: ₱5,000
March net sales: ₱150,000
Physical count March 31 ending inventory: ₱70,000

During March (periodic titles):

1. Purchase Journal / AP: Debit Purchases ₱60,000; Credit Accounts Payable ₱60,000
2. Cash Payments: Debit Freight-In ₱2,000; Credit Cash ₱2,000
3. General Journal (or returns journal): Debit Accounts Payable ₱5,000; Credit Purchase Returns and Allowances ₱5,000

Net purchases = 60,000 + 2,000 − 5,000 = ₱57,000
COGS = 80,000 + 57,000 − 70,000 = ₱67,000

At period end (worksheet or adjusting/closing approach taught in your CBC), the books recognize COGS ₱67,000 and restate Inventory to ₱70,000. Critically, no COGS entry was made on each sales day—only the sales revenue entry (cash or credit) was recorded when goods were sold.

Perpetual System — Accounts and Flow

Perpetual inventory treats Inventory as a living asset account:

• Purchase of merchandise: Debit Inventory, Credit Accounts Payable or Cash
• Freight-In often added to Inventory (or tracked then closed into Inventory)
• Purchase returns: Debit AP/Cash, Credit Inventory
• Each sale needs two entries: (1) revenue—Debit Cash or AR, Credit Sales; (2) cost—Debit COGS, Credit Inventory for the cost of units sold

Same facts — perpetual journalizing

Assume the March 13 goods cost ₱60,000, freight ₱2,000 is inventoried, and ₱5,000 cost is returned. Suppose goods sold in March had a cost of ₱67,000 (same economic COGS as above for comparison).

1. Debit Inventory ₱60,000; Credit Accounts Payable ₱60,000
2. Debit Inventory ₱2,000; Credit Cash ₱2,000
3. Debit Accounts Payable ₱5,000; Credit Inventory ₱5,000
4. For sales totaling ₱150,000 revenue: Debit Cash/AR ₱150,000; Credit Sales ₱150,000
5. Concurrently: Debit COGS ₱67,000; Credit Inventory ₱67,000

After these entries, Inventory should equal beginning ₱80,000 + 57,000 net additions − 67,000 cost of sales = ₱70,000, matching the count if there is no shrinkage. If the count is lower, a separate shrinkage entry debits COGS (or a loss account) and credits Inventory.

COGS Entries Compared

Assessment writers love asking for “the entry to record the sale” under perpetual—and marking wrong any answer that omits the COGS/Inventory leg.

Assessment Traps When Switching Methods

1. Title mismatch: Problem says “periodic,” but options show Debit Inventory on purchase—reject those. Problem says “perpetual,” but options show Debit Purchases—reject those.
2. Half-switch: Recording purchases to Inventory but forgetting the COGS entry on sale mixes systems and overstates Inventory and gross profit.
3. Using sales price as COGS: The perpetual credit to Inventory must be cost, not selling price. Selling price belongs only in the Sales credit.
4. Skipping the count under periodic: Without ending inventory, COGS cannot be computed; “Purchases” alone is not COGS.
5. Treating Freight-In as period expense automatically: In trading accounts, freight-in is a merchandise cost component (periodic: added in net purchases; perpetual: typically inventoried), not store rent.
6. Returns side switched: Purchase returns reduce Purchases/Inventory cost; sales returns reduce Sales (and under perpetual also reverse COGS/Inventory when goods are restored).

Practical Bookkeeping Notes for NC III

• Special journals must mirror the method: a Purchase Journal “Purchases” column signals periodic; an “Inventory” column signals perpetual.
• Subsidiary inventory records (stock cards) often support perpetual systems; periodic systems rely more on the count and purchases archives.
• Either method can produce the same COGS if counts, costs, and cutoff are correct—the difference is timing and account titles, which is exactly what multiple-choice items probe.
• For sole props, drawings of merchandise for personal use also differ: periodic often debits Drawings and credits Purchases (or a withdrawals account); perpetual debits Drawings and credits Inventory at cost.

Mini Decision List

Before you journalize a merchandise transaction, ask:

1. Is the business a trader with inventory? If yes, identify the inventory method stated.
2. Is this a purchase, return, freight, or sale?
3. For a sale under perpetual, did I record both revenue and COGS?
4. For period-end under periodic, did I use Beginning Inventory + Net Purchases − Ending Inventory?

Keep PHP amounts neat, document numbers complete, and never invent an Inventory debit in a clearly periodic problem. Matching the system is as important as balancing debits and credits.