Periodic vs perpetual inventory: journal entries side by side
Both systems end up at the same cost of goods sold. They just get there at different times. See the same transactions journalized both ways, and the difference stops being confusing.
01The one-sentence difference
Perpetual tracking updates Merchandise Inventory and records cost of goods sold at every sale. Periodic tracking waits: purchases go to separate accounts during the period, and cost of goods sold is computed at the end from a physical count.
| Question | Periodic | Perpetual |
|---|---|---|
| Where do purchases go? | Purchases account | Merchandise Inventory |
| Where does freight-in go? | Freight-In account | Merchandise Inventory |
| How many entries per sale? | One (the sale) | Two (the sale, and its cost) |
| When is COGS known? | At period end, after the count | After every sale |
| What is the count for? | Finding ending inventory, and therefore COGS | Checking the records; any difference is shrinkage |
02Same transactions, both systems
An original illustration. Bituin Trading starts the month with no inventory.
- Buys 100 units at ₱200 on account, FOB shipping point: ₱20,000.
- Pays the trucking company ₱1,000 in cash for that shipment.
- Sells 60 units at ₱350 on account: ₱21,000.
- At month-end, the count finds 40 units on hand.
Because the terms are FOB shipping point, the buyer owns the goods in transit and bears the freight. So the ₱1,000 is part of the cost of the goods: ₱21,000 ÷ 100 units = ₱210 per unit.
1 · The purchase
Periodic
Perpetual
2 · The freight
Periodic
Perpetual
3 · The sale
Periodic: one entry. Cost is ignored for now.
Perpetual: two entries. The second one moves the cost of the 60 units out of inventory.
4 · The count
Perpetual: the count finds 40 units × ₱210 = ₱8,400, which matches the books. No entry is needed. If the count had come up short, the difference would be written off as inventory shrinkage.
Periodic: the count is how you find cost of goods sold at all. That's the next section.
03The cost of goods sold schedule (periodic)
| Beginning inventory | 0 |
| Add: Purchases | 20,000 |
| Add: Freight-In | 1,000 |
| Cost of goods available for sale | 21,000 |
| Less: Ending inventory (40 × ₱210) | (8,400) |
| Cost of goods sold | 12,600 |
Same ₱12,600 as the perpetual system, and the same gross profit: ₱21,000 − ₱12,600 = ₱8,400. In a full problem, purchase returns and allowances and purchase discounts are also deducted to get net purchases.
Why both give the same answer here: nothing went missing. When goods are lost or stolen, the periodic system quietly buries the loss inside COGS. The perpetual system shows it separately, which is one reason businesses use it.
04FOB shipping point vs destination
The FOB term answers who owns the goods in transit and who bears the freight. Whether freight is "prepaid" or "collect" only tells you who handed cash to the trucker.
| Term | Ownership passes… | Freight is the cost of… | Recorded as |
|---|---|---|---|
| FOB shipping point | When goods leave the seller's dock | The buyer | Freight-In: part of the cost of goods |
| FOB destination | When goods reach the buyer's door | The seller | Freight-Out: a selling expense, never part of COGS |
Trap: Freight-Out is an operating expense on the seller's income statement. Students often add it to cost of goods sold. It never belongs there.
05Self-check (with answers)
1. Under a perpetual system, a customer returns goods that cost ₱800 and were sold for ₱1,200. What are the entries?
Two entries, mirroring the sale. Dr Sales Returns and Allowances 1,200 · Cr Accounts Receivable 1,200; and Dr Merchandise Inventory 800 · Cr Cost of Goods Sold 800.
2. Beginning inventory ₱15,000; purchases ₱60,000; freight-in ₱2,000; ending inventory ₱12,000. What is COGS?
₱15,000 + ₱60,000 + ₱2,000 = ₱77,000 available; less ₱12,000 = ₱65,000.
3. Goods are shipped FOB destination and the seller pays ₱1,500 of freight. How does the seller record it?
Dr Freight-Out (selling expense) 1,500 · Cr Cash 1,500. Under FOB destination the seller owns the goods until they arrive, so the freight is the seller's cost.
Work the full merchandising cycle
Chapter 7 of the book covers purchases, sales, discounts, returns and taxes in full. The companion portal adds a COGS calculator, an invoice settlement calculator, and board-exam-style CPALE questions with rationales. Try the free sample questions first.