![]() Inventory records are fixed until the end of the next period.ĭoing a physical count of all your on-hand inventory items increases the likelihood of human error. With periodic inventory, however, there’s no way to account for these unexpected changes. Sometimes, a business will experience goods lost in transit, purchase returns, product recalls, and the like. Not having access to real-time data can also hinder other business decisions. If inventory falls too low or there is an undetected discrepancy in accounts, it could mean a loss in sales and customers. For the rest of the period, a business relies on estimations of its current inventory levels. In periodic inventory, the only time records are entirely accurate are at the beginning and end of the period. Here are some disadvantages of using a periodic system. Periodic inventory can be too simplistic, especially for businesses experiencing growth or expanding to new locations. Plus, a simple inventory system will be easier to manage and maintain in the long run. It’s relatively easy to keep tabs on sale transactions and estimate the current inventory levels. And since inventory is only updated periodically, more resources are available for other areas of business.įor businesses with a single location or few product lines, a periodic inventory system can do the job. Whereas most operations run on some type of inventory management software, periodic inventory can be done with spreadsheets-which means there are no added costs for software or training. Without complicated calculations or multiple accounting records, a periodic inventory method can be implemented without major planning or preparation. Periodic inventory systems are valued for their simplicity, and all it takes is some time to physically count your starting inventory at scheduled intervals throughout the year. Using a periodic inventory system, a business only needs to update its inventory account at the beginning and end of the accounting period. Whichever method a business applies, the ending inventory is then subtracted from the cost of goods available for sale to arrive at the total cost of goods sold (COGS).Ĭost of goods available for sale – Ending inventory = Cost of goods sold (COGS)Ĭontinuing from the above example, if the business has an ending inventory of $50,000, its COGS is $200,000 for the period. Its counterpart, last-in, first-out (LIFO), assumes the opposite and calculates ending inventory using the first items purchased. For example, first-in, first-out (FIFO) will assume the first items bought were the first items sold, and the ending inventory includes the most recently purchased items. The exact ending or closing inventory depends on the valuation method used by the business. The amount of ending inventory is then carried over as the next period’s beginning inventory. ![]() If its purchases account total is $100,000, the cost of goods available for sale is $250,000 for the given period.Ī physical inventory count is also done to determine the period’s ending inventory balance during this time. ![]() Take, for example, a business with a beginning inventory of $150,000. This amount equals the cost of inventory or cost of goods available for sale.īeginning inventory + Purchases = Cost of goods available for sale ![]() If a business acquires any additional inventory, it is listed under the purchases account in a general ledger.Īt the end of every period, the purchases account total is added to the beginning inventory. Aside from this initial record, no other updates are made to the inventory ledger until the next period. Periodic inventory systems start by taking a physical inventory count at the beginning of a specific period.
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