In a periodic inventory system:

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In a periodic inventory system, the cost of merchandise on hand is determined by relating the quantities on hand to records showing each item's original cost. This is because the company does not maintain a continuous record of the amount of inventory on hand. Instead, physical counts are performed periodically, and the inventory value is calculated as the cost of the goods that should be on hand based on the physical count. The company records the cost of new merchandise in the temporary Purchases account, which is closed to the permanent Merchandise Inventory account at the end of the period.

In a Periodic Inventory System