In the periodic system, the company updates inventory records only periodically. All inventory purchases are debited to purchase account. The cost of goods sold and inventory values are determined at the end of the period. At the end of the period, we add purchases to the beginning inventory to arrive at the cost of goods available for sale. Then we subtract ending inventory to calculate COGS.
Under FIFO and specific identification methods, the values for COGS and ending inventory will be same in both perpetual and periodic inventory system. However, they will differ in LIFO and average cost methods.
Example
We will use the same example of SuperMart.
| Date | Purchases (Sales) | Balance |
|---|
| 1 | Beginning inventory (@ $3.80) | 500 |
| 2 | Purchased 1,500 units (@ $4.00) | 2000 |
| 14 | Purchased 6,000 units (@ $4.40) | 8000 |
| 20 | Sold 4,000 units | 4000 |
| 30 | Purchased 2,000 units (@ $4.75) | 6000 |
Our earlier calculations of COGS and Ending inventory were based on periodic inventory system. We will now recalculate the same under perpetual inventory system using FIFO and LIFO methods.
FIFO Perpetual System
The COGS and Ending inventory are the same in FIFO perpetual system as in FIFO periodic system.
On June 20, 4000 units were sold. The COGS will be calculated as follows:
| Units | From | Calculation | Cost |
|---|
| 500 | June 1 Beginning inventory | 500 units * $3.80 | $1,900 |
| 1,500 | June 2 purchase | 1,500 units * $4.00 | $6,000 |
| 2,000 | June 14 purchase | 2,000 units * $4.40 | $8,800 |
| FIFO COGS | | | $16,700 |
On June 30, there are 6,000 units in inventory. The ending inventory will be calculated as follows:
| Units | From | Calculation | Cost |
|---|
| 4000 | June 14 purchase | 4,000 units * $4.40 | $17,600 |
| 2,000 | June 30 purchase | 2,000 units * $4.75 | $9,500 |
| FIFO Ending Inventory | | | $27,100 |
LIFO Perpetual System
On June 20, 4000 units were sold. The COGS will be calculated as follows:
| Units | From | Calculation | Cost |
|---|
| 4000 | June 14 purchase | 4000 units * $4.40 | $17,600 |
| LIFO COGS | | | $17,600 |
On June 30, there are 6,000 units in inventory. The ending inventory will be calculated as follows:
| Units | From | Calculation | Cost |
|---|
| 500 | June 1 Beginning inventory | 500 units * $3.80 | $1,900 |
| 1,500 | June 2 purchase | 1,500 units * $4.00 | $6,000 |
| 2000 | June 14 purchase | 2,000 units * $4.40 | $8,800 |
| 2000 | June 30 purchase | 2,000 units * $4.75 | $9,500 |
| LIFO Ending Inventory | | | $26,200 |
Note that the COGS and Ending inventory under Perpetual LIFO are different from periodic LIFO.
