Periodic Inventory System

What is a periodic inventory system?

A periodic inventory system is a method for inventory control within your greater inventory management strategy. Periodic systems do not track inventory on a daily basis, but rather, they allow companies to check their beginning inventory and ending stock levels within a designated time period. These systems are designed to track inventory and COGS using physical cycle counts; this means, when physical inventory is complete, the balance in the purchase account transfers to the inventory account, and is adjusted to match the cost of the ending inventory.

4 advantages of a periodic inventory system

A periodic inventory management system operates exactly as its name suggests — inventory is tracked by a periodic physical count of every item in stock. Among the advantages of this approach are reduced costs, user-friendly processes, and simple record-keeping. 

1. Reduced costs

Because the periodic inventory method uses minimal materials, it allows for quick setup with fewer total costs. With periodic systems, you don’t need to invest in costly software solutions;  technically speaking, business owners don’t have to invest much of anything, except for the time involved to count your physical inventory according to the predetermined time period.

2. User-friendly

Periodic accounting systems make it easy for businesses to start using the program on day one, since they don’t rely on complex devices or technology. This method requires very little training and is incredibly easy to implement, which in some ways, makes it a less stressful option for maintaining and managing your goods available for sale. 

3. Simple record-keeping

Periodic inventory makes use of just a few simple records: (1) the amount of inventory items currently on hand, (2) the amount of raw materials purchased, and (3) the amount of inventory sold. With only three metrics to account for, record-keeping with periodic systems is typically very straightforward, meaning it can be incorporated into your inventory valuation at any time.

4. Ideal for small businesses

Given that periodic systems’ pricing is low cost (and they’re user-friendly), it makes sense they’re a great choice for small businesses who don’t have a ton of capital. Companies with few team members, limited inventory value, and a modest number of orders placed throughout the year may have better success using a periodic approach to inventory control.

Frequently Asked Questions

  • What is an example of a periodic inventory system?

    Periodic inventory is an accounting system for stock valuation that’s performed at specified intervals. Companies physically count their products at the end of the accounting period and use this information to balance their general ledger. From there, they’ll apply that inventory balance to the next (or new) period. Businesses who frequently use a periodic approach include art galleries and car dealerships, both of whom sell relatively few units each month. 

  • When would you use a periodic inventory system?

    The periodic inventory system is ideal for smaller businesses with minimum amounts of inventory. Lower inventory levels mean the physical inventory count is easier to complete, and it’s also easier to estimate the cost of goods sold for temporary time periods. In addition, a periodic approach is best suited for companies who can calculate the cost of closing inventory using LIFO, FIFO, ABC analysis, or their preferred accounting method. 

  • What is the difference between perpetual and periodic inventory systems?

    With periodic inventory systems, physical inventory counts are conducted weekly, monthly, quarterly, or at the end of the year, depending on the size of the business, the quantity of stock, and the rate of inventory turnover. In essence, periodic strategies tell you about the inventory at the beginning and end of an accounting period (but don’t track stock on a day-to-day basis). 

    By contrast, perpetual inventory systems are much less time-consuming, thanks to built-in automations for real-time inventory tracking around the clock. Perpetual inventory accounting continually updates your stock levels by recording when SKUs are received, sold, moved, and picked, to then deliver the most precise, up-to-date inventory information.