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Periodic Inventory

What is the ‘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 intervals. This accounting method takes inventory at the beginning of a period, adds new inventory purchases during the period and deducts ending inventory to derive the cost of goods sold (COGS).

Next Up

  1. Beginning Inventory

  2. Inventory

  3. Inventory Accounting

  4. Retail Inventory Method

BREAKING DOWN ‘Periodic Inventory’

Under the periodic inventory system, a company will not know its unit inventory levels nor COGS until the physical count process is complete. This system may be acceptable for a business with a low number of SKUs in a slow-moving market, but for all others the perpetual inventory system is considered superior for the following main reasons: 1) 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; 2) the perpetual system keeps updated COGS as movements of inventory occur; the periodic system cannot give accurate COGS figures between counting periods; 3) 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; 4) 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.

Calculating COGS Under the Periodic Inventory System

COGS is a fundamental income statement account, but a company using a periodic inventory system will not know the amount for its accounting records until the physical count is completed.

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

  1. Beginning Inventory

    Beginning inventory is the book value of inventory at the start …
  2. Inventory

    Inventory is the term for merchandise or raw materials on hand.
  3. Inventory Accounting

    Inventory account is the body of accounting that deals with valuing …
  4. Retail Inventory Method

    The retail inventory method is a fast and easy valuation alternative …
  5. Inventory Write-Off

    An inventory write-off is an accounting term for the formal recognition …
  6. Holding Costs

    Holding costs are a major component of supply chain management …
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Periodic Inventory System

By James Wilkinson on July 24, 2013 in WikiCFO

Periodic Inventory System Definition

A periodic inventory system or the periodic inventory method is an accounting method in which you determine the amount of inventory at the end of each accounting period or in specified periods. Furthermore, a periodic inventory system requires a physical count for each period. Then quantify the amount on the financials.

Periodic Inventory System Meaning

A periodic inventory system differs from the perpetual inventory method because there is no continuous record taken to determine the inventory value . Take the actual count of inventory items. Then multiply each of the inventory items by its unit price . Often times, use both methods where the perpetual keeps a running account of the inventory value . A physical periodic count makes sure that the value remains even. By combining the two inventory methods , it means that the financial statements will be most accurate per the periodic method . Protect the inventory from day to day per the perpetual method .

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Periodic inventory System

Periodic inventory System

See Also:
Perpetual Inventory System
Just in Time Inventory System
Economic Order Quantity (EOQ)
Days Inventory Outstanding Analysis
How to manage inventory

Other People’s Money
Perpetual Inventory System

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