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.
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.