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Home Valuation of Inventory/Stock Periodic method

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Periodic method

Under this method, the inventory account is not updated at any time during an accounting period as all purchases from suppliers are recorded in the purchases account and not in the inventory account. There is no accurate inventory record to access during the period. The inventory account shows only the balance as brought forward from the previous year.

The inventory account is adjusted only once at the end of the financial year to reflect the actual cost of the goods on hand. This is done by physical count of the inventory items to produce an accurate record of the inventory. The inventory or stock account in the general ledger is then adjusted accordingly. With the purchases and the adjusted closing stock figures, the cost of goods sold would also be calculated for the financial year.

At the end of the year (accounting period), the purchases account is closed and the cost of goods sold is calculated on the income statement by adding the opening stock to the cost of goods purchased and deducting the closing stock.


Journal entries for financial year-end adjustments

Date Accounts Folio Debit Credit



$ $
20XX



Dec 31 Cost of goods sold
1,350

Inventory/Stock

1,350

(Transfer of opening stock)







Dec 31 Inventory/Stock
1,420

Cost of goods sold

1,420

(Transfer of closing stock)







Dec 31 Cost of goods sold
2,530

Purchases

2,530

(Transfer of year's purchases)







Dec 31 Profit and loss
2,460

Cost of goods sold

2,460

(Transfer of cost of goods sold)



Inventory/Stock Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Jan 01 Balance b/d
1,350
Dec 31 Cost of goods sold
1,350
Dec 31 Cost of goods sold
1,420
" Balance c/d
1,420












2,770



2,770










Purchases Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Jun 30
Creditors

1,280
Dec 31 Cost of goods sold
2,530
Nov 30 Creditors

1,250
















2,530



2,530










Creditors Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Dec 31 Balance c/d

4,700
Jan 01 Balance b/d

2,170





Jun 30
Purchases

1,280





Nov 30 Purchases
1,250












4,700



4,700










Sales Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Dec 31 Profit and Loss

5,790
Apr 16
Debtors
2,350





Jul 28
Debtors
3,440












5,790



5,790










Debtors Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Jan 01 Balance b/d

2,610

Dec 31 Balance c/d

8,400
Apr 16 Sales
2,350




Jul 28 Sales
3,440
















8,400



8,400










Cost of Goods Sold Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20XX



20XX


Dec 31
Inventory/Stock

1,350
Dec 31 Inventory/Stock

1,420
"
Purchases
2,530
"
Trading Account

2,460












3,880



3,880










Inventory/Stock Account
The only amount on the Inventory Account throughout the year is the opening balance ($1,350) b/d from the previous year. The inventory account is adjusted only at the end of the financial year. The opening balance is transferred to the Cost of Goods Sold account. The closing inventory account balance is $1,420 which is stock on hand at the end of the year obtained from the annual stock count. This closing balance is also transferred to the Cost of Goods Sold account as well as carried forward to the next financial year.

Purchases Account
All purchases made during the year are recorded in the Purchases Account, and not in the inventory account. The inventory account is therefore not updated during the year. The purchases account is closed at the end of the financial year and the total purchases are transferred to the Cost of Goods Sold Account.

Cost of Goods Sold Account
The balance in this account is the cost of goods sold and is determined by adding opening stock to purchases less closing stock. This balance is transferred to the Trading and Profit and Loss Account to calculate the gross profit.


Trading and Profit and Loss Account for the year ended 31 December 20XX

Sales
5,790
Less: Cost of goods sold:


Opening stock 1,350

Purchases 2,530


3,880

Less: Closing stock 1,420 2,460
Gross Profit
3,330
Less: Expenses


Last Updated (Saturday, 09 October 2010 19:59)