Hi Kirti,
To calculate COGS under the periodic method, the following formula is use:
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold
Let me give you an example below:
Scenario-01 (if merchandise of $10,000 is included in the inventory )
Cost of Goods Sold | | |
| Inventory-beg. | 100,000.00 | |
| Add: Purchases | 50,000.00 | |
| Goods available for sale | 150,000.00 | |
| Less: Inventory-end | 90,000.00 | 60,000.00 |
Scenario-02 (if merchandise of $10,000 is omitted in the inventory )
Cost of Goods Sold | | |
| Inventory-beg. | 100,000.00 | |
| Add: Purchases | 50,000.00 | |
| Goods available for sale | 150,000.00 | |
| Less: Inventory-end | 80,000.00 | 70,000.00 |
As you can see, in Scenario-2, where the goods are omitted resulted in an overstated COGS amounting to $10,000. Under the periodic method, the inventory balance is not updated on a continuous basis, but the COGS and the value of ending inventory is determined by conducting a physical count of the inventory on hand at the end of the period.
Remember COGS and ending inventory have an inverse relationship, meaning if the latter is understated, the former will be overstated.