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Example of Adjusting Entries for Merchandise Inventory Using the Periodic Method
Briantama Afiq Ashari
Have you ever felt confused when learning about adjusting entries for inventory, especially with the periodic method? You’re not alone!
Many people often make mistakes when recording it—even though this step is crucial for financial accuracy, especially in the food & beverage business.
Let’s go through the basics and look at a concrete example so you can understand it better.
Why Adjusting Entries Are Essential
Businesses like restaurants have fluctuating inventory (raw materials) all the time.
Adjusting entries are the way to ensure financial statements reflect actual conditions—this includes the correct Cost of Goods Sold (COGS) and valid ending inventory.
Without these adjustments, financial statements can drift far from the business reality.
Read Also: Understand the Definition of Hot Kitchen and Cold Kitchen to Avoid Misunderstandings!
What Is the Periodic Method?
After understanding why adjustments are important, let’s focus on the commonly used periodic method.
In this method, inventory is not recorded with every transaction but only at the end of the accounting period.
That means adjusting entries for merchandise inventory only appear when closing the books at the end of the month or year.
This is very different from the perpetual method, which updates inventory continuously with each transaction.
The periodic method is simpler and fits small to medium businesses like restaurants or cafés—especially if they don’t yet use a digital inventory system.
This is also where adjusting entries tied to the income summary account play a key role.
Steps to Create Adjusting Entries for Merchandise Inventory
To avoid any confusion, let's discuss the steps. Please pay close attention:
- Record the beginning inventory balance
- Calculate total purchases (including freight-in, discounts, returns)
- Conduct a physical stock count to determine the ending inventory balance
- Calculate COGS (Cost of Goods Sold):
- Make two adjusting entries:
- Close the Purchases account into Inventory: Purchases → Inventory
- Record COGS: COGS → Inventory.
Real Case Example
Suppose PT. Abadi’s trial balance shows:
- Beginning Inventory: Rp 24,000,000
- Net Purchases: Rp 174,000,000 (161M purchases + 10M freight – 4M discounts and returns)
- Ending Inventory (from physical count): Rp 31,000,000.
COGS Calculation:
24,000,000 + 174,000,000 – 31,000,000 = Rp 167,000,000
Adjusting entries would be:
So, the inventory balance in the books will match the physical stock count: Rp 31,000,000
Periodic vs Perpetual Method
Source: istockphot
To make it clearer, here’s the comparison:
Read Also: Culinary Business Tips for Young People
Common Mistakes to Avoid
Even though it seems simple, many people still make mistakes. Some common mistakes include:
- Entering incorrect beginning/ending inventory values
- Misplacing debit/credit accounts (COGS vs Inventory)
- Not understanding how the income summary works.
Why Do Culinary Entrepreneurs Need to Understand This?
Source: istockphoto
In restaurants, raw material inventory is a vital asset. Miscalculations can distort financial statements and lead to losses.
By understanding adjusting entries for inventory, you can ensure more accurate cost and stock management—leading to better business decisions.
FAQ: Adjusting Entries for Inventory (Periodic Method)
1. Why do we need to adjust entries for inventory?
Because recording only transactions without end-period adjustments can make financial statements inaccurate.
2. What’s the difference between the periodic and perpetual methods?
The periodic method records inventory only at the end of the period, while the perpetual method updates inventory with every transaction.
3. How is COGS calculated with the periodic method?
Formula: COGS = Beginning Inventory + Net Purchases – Ending Inventory
4. What’s an example of an adjusting entry at the end of the period?
For example, debit COGS and credit Inventory based on the stock-taking results.
5. What happens if we don’t make adjusting entries?
Inventory and expense (COGS) values can be misstated, profit & loss will not be reliable, and business strategies may go off-track.
Conclusion
Understanding adjusting entries for inventory using the periodic method isn’t just theory—it’s essential to keep your F&B business financial reports accurate and professional.
If you want to simplify inventory adjustments without manual hassle, it’s time to use ESB Core. This system automatically manages stock, COGS, and financial reporting more efficiently.
Contact the ESB Team now for comprehensive accounting and inventory solutions!
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