Periodic Inventory

What Is Periodic Inventory?

The periodic inventory system is a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific stretches. This accounting method takes inventory toward the beginning of a period, adds new inventory purchases during the period and deducts ending inventory to infer the cost of goods sold (COGS).

Figuring out Periodic Inventory

Under the periodic inventory system, a company won't have the foggiest idea about its unit inventory levels nor COGS until the physical count process is complete. This system might be acceptable for a business with a low number of SKUs in a slow-moving market, however for all others, the perpetual inventory system is viewed as prevalent for the following principal reasons:

1. The perpetual system constantly refreshes the inventory asset ledger in a company's database system, providing management with an instant perspective on inventory; the periodic system is tedious and can create old numbers that are less helpful to management.
2. The perpetual system keeps refreshed COGS as developments of inventory happen; the periodic system can't give accurate COGS figures between counting periods.
3. The perpetual system tracks individual inventory things so in case there are defective things — for instance, the source of the problem can rapidly be recognized; the periodic system would probably not allow for brief resolution.
4. The perpetual system is tech-based and data can be upheld, organized and controlled to create educational reports; the periodic system is manual and more inclined to human blunder, and data can be lost or lost.

Special Considerations: COGS

The cost of goods sold, normally alluded to as COGS, is a fundamental income statement account, yet a company utilizing a periodic inventory system won't have the foggiest idea about the amount for its accounting records until the physical count is completed.

The COGS will differ emphatically with inventory levels, as it is frequently less expensive to buy in mass — in the event that you have the storage space to oblige.

Assume a company has a beginning inventory of $500,000 on January 1. The company purchases $250,000 of inventory during a three-month period, and after a physical inventory account, it decides it has ending inventory of $400,000 at March 31, which turns into the beginning inventory amount for the next quarter. COGS for the primary quarter of the year is $350,000 ($500,000 beginning + $250,000 purchases - $400,000 ending).

Due to the time disparities, it turns into the onus of the manager or business owner responsible for monitoring period inventory assuming it's a good idea to their primary concern to distribute hours to count inventory daily, week after week, month to month, or yearly.