What Is Periodic Inventory System? How It Works and Benefits

The periodic inventory system is a method of accounting for inventory that involves taking physical counts of inventory at regular intervals and updating the inventory accounts accordingly. In this method, periodic inventory system journal entries are made to record the purchase, sale, and ending inventory balances. Inventory refers to any raw materials and finished goods that companies have on hand for production purposes or that are sold on the market to consumers. Both are accounting methods that businesses use to track the number of products they have available. Periodic inventory is one that involves a physical count at various periods of time while perpetual inventory is computerized, using point-of-sale and enterprise asset management systems.

• For the periodic inventory method, there’s no need to continually record the inventory levels.
• The purchases made during the year are $ 2,500,000, and after physical verification, it is found that the company had an inventory of $ 650,000 as the company follows the periodic inventory system.
• The former is more cost-efficient while the latter takes more time and money to execute.
• Larger firms can also use this approach, although things become more complicated when numerous staff and hundreds of orders are involved.
• Periodic inventory is also a good option for those who want to minimize costs, or don’t have the current resources to maintain inventory software.
• Periodic inventory systems involve taking a manual count of all goods in stock.

Changes in inventory are accurate (as long as there is no theft or damage to any goods) and can be easily accessed immediately. The information collected digitally is sent to central databases in real-time. Periodic inventory systems rely on a lot of manual data entry, which can be time-consuming for some businesses. With a periodic inventory system, you can easily manage your records using either a physical or computer-based spreadsheet.

2 Compare and Contrast Perpetual versus Periodic Inventory Systems

Recordkeeping in a periodic inventory system may also become more time-consuming as your business grows and you add more inventory items. You might want to consider ecommerce accounting software and automated https://www.bookstime.com/articles/zoho-books methods, such as the perpetual inventory system, if your business is growing fast. The inventory at period end should be $7,872, requiring an entry to increase merchandise inventory by $4,722.

The choice of inventory management method depends on the size of the business, the resources available, and the funds available with them. Carefully evaluating these factors can help the business choose the right method of inventory management. The following cost of when a periodic inventory system is used goods sold, inventory, and gross margin were determined from the previously-stated data, particular to LIFO costing. The cost of goods sold, inventory, and gross margin shown in Figure 10.7 were determined from the previously-stated data, particular to FIFO costing.

2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method

While this method is straightforward and cost-effective for a small store, it means they lack real-time data on their inventory levels, which can pose challenges for managing stock throughout the year. Throughout the accounting period, all purchases of inventory are recorded as they occur. However, these purchases are not immediately reflected in the inventory account. Notice that there is no particular need to divide the inventory account into a variety of subsets, such as raw materials, work-in-process, or finished goods. The average cost method calculations are performed at the end of the accounting period in a periodic inventory system.

• For example, adding the beginning balance of inventory to the cost of inventory purchases calculates the cost of goods for sale.
• As a business grows, the limitations of the periodic inventory system become more pronounced.
• Businesses may miss out on timely replenishment, capitalizing on trends, or responding effectively to changes in demand, potentially affecting sales and customer satisfaction.
• Instead, this cost method relies on simpler record-keeping methods — which can help you reduce the total cost of inventory management by eliminating an additional software cost.
• Clothing stores usually have seasonal sales with most sales happening during the summer and winter.