- How to perform journal entries for the periodic inventory system.
- Using T-accounts to post the balances.
- Calculating the cost of goods sold for the income statement.


[SLIDE 1]

We covered in a previous lesson, how to prepare the multiple step income statement for the perpetual inventory system. Now let's look at the same process applied to the periodic system.
 
For this multiple-step income statement, we will use the transactions listed above. Keep in mind the terms for payment are 2/10, n/30, which means that there will be a 2% discount if payment is made within 10 days.
 
The beginning inventory and ending inventory amounts are also listed below the transactions.

First, we would need to journalize the first four transactions that are detailed in the example above. Here are the transactions in the order they are listed. Keep in mind there would not be a journal entry for the fifth step with FOB destination because the seller is paying for shipping costs.


[SLIDE 2]

Before we can find out the balance that needs to be paid in full, let's sum up the balance of each account using the T-account format. The cash account has a beginning debit balance of $15,000.

We will total up the amounts in accounts payable to come up with the total amount due of $8,500. Since the company is paying within 10 days, they will get a $170 discount and pay a total of $8,330 in cash.

Once we record the journal entry for the final payment, we would then go back up to the T-accounts and list the entries above. Now that payment has been issued, the accounts payable would balance out to zero.


[SLIDE 3]

We reviewed preparing the multiple step income statement in one of the previous lessons. Now let's take a look at how the cost of goods sold is prepared for the periodic system income statement.
 
1. We take the total purchases less the returns and discount amounts.
2. The freight in amount is added to the previous sum to come up with the cost of goods purchased.
3. The beginning inventory is then added to the cost of goods purchase to record the available inventory.
4. We subtract the ending inventory from the available to conclude with the total cost of goods sold (COGS).


[SLIDE 4]

The graphic above summarizes how the cost of goods sold is calculated on the income statement.
 
If you want to look at the rest of the steps involved in preparing the multiple-step income statement, refer to Lesson 31 where we walk through this process in more detail. The main difference between the perpetual and periodic inventory systems is the breakdown of cost of goods purchased for the periodic system.