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What is the Periodic Inventory System?

The periodic inventory system is a method of inventory valuation in which a physical count of the inventory is performed at specific intervals – weekly, monthly, quarterly, or even yearly.

Thus it does not track the inventory on a daily or per-sale basis. 

Businesses that sell a large number of low‐cost items often find the maintenance of perpetual inventory records for all types of inventory too costly and time‐consuming to be practical, unless they have access to a computerized inventory system.

Such businesses include fruit shops, newsagents, butchers, and coffee shops.

A store operating with high volume may conveniently record the amount of each sale but would find it difficult to trace the cost of each item sold back to detailed inventory records.

Entities that do not use a perpetual inventory system use a periodic inventory system.

See differences between perpetual inventory system &  periodic inventory system.

Perpetual Inventory System Periodic Inventory System
The perpetual system continuously updates the inventory asset ledger in a company's database system, giving management an instant view of inventory
The periodic system is time-consuming and can produce stale numbers that are less useful to management.
The perpetual system keeps updated COGS as movements of inventory occur.
The periodic system cannot give accurate COGS figures between counting periods.
The perpetual system tracks individual inventory items so that in case there are defective items—for example, the source of the problem can quickly be identified
The periodic system would most likely not allow for prompt resolution.
The perpetual system is tech-based and data can be backed-up, organized and manipulated to generate informative reports.
The periodic system is manual and more prone to human error, and data can be misplaced or lost.

Which businesses use the Periodic Inventory System?

Periodic inventory systems are often adopted by small businesses that sell relatively few inventory units each month such as art galleries and car dealerships.

Additionally, smaller companies that don’t have the staff to work with a perpetual system often use the periodic inventory system until they get to a point where the benefits of a perpetual inventory system outweigh the costs of installing the system.

Physical Counting of Inventory

In the Periodic Inventory System, the entire stock is physically verified at a time, once in a year.  This physical verification usually is done at the end of the accounting period.

You’ll physically count everything you have in inventory, and then reconcile it against what your books say you should have.

You’ll know what you had after the last count, referred to as your starting inventory for the period, and you know what you’ve ordered and what you’ve sold since then.

In this case, work is to be stopped for the physical counting of stocks.  A team of stock-checkers counts all stock to ensure that all stock is counted once and that no omissions or duplications occur. The inventory sheets are prepared and verified with book balances.

The cost of the goods, when issued or sold, is not known at the time of the transaction.

Calculate the Cost of goods sold 

You can calculate inventory costs, or cost of goods sold, under the periodic inventory system as follows:

Beginning inventory + Purchases = Total cost of inventory (goods)
Total cost of inventory – Ending inventory = Total cost of goods sold

This inventory system is not recommended for use in large organizations or organizations that are reliant on large inventory holdings. 

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