Periodic Inventory System

Definition

A periodic inventory system is an accounting method used to track and value a company's inventory. It involves taking a physical count of the inventory at the end of an accounting period, such as monthly or annually, to determine the cost of goods sold and the value of the remaining inventory.

5 Must Know Facts For Your Next Test

1. The periodic inventory system is commonly used by merchandising and manufacturing organizations, as it allows them to track the cost of inventory and cost of goods sold.
2. In a periodic inventory system, the cost of goods sold is calculated at the end of the accounting period by subtracting the ending inventory from the sum of the beginning inventory and purchases.
3. Periodic inventory systems require a physical count of the inventory at the end of each accounting period, which can be time-consuming and prone to errors.
4. Compared to a perpetual inventory system, the periodic system provides less real-time information about inventory levels and costs.
5. Periodic inventory systems are often simpler and less expensive to maintain than perpetual inventory systems, making them a more practical choice for small businesses.

Review Questions

• Explain how a periodic inventory system differs from a perpetual inventory system in terms of tracking inventory and cost of goods sold.
  • In a periodic inventory system, the cost of goods sold is calculated at the end of an accounting period by subtracting the ending inventory from the sum of the beginning inventory and purchases. This requires a physical count of the inventory, which can be time-consuming and prone to errors. In contrast, a perpetual inventory system continuously tracks inventory levels and costs, updating the records each time a sale or purchase occurs. This provides more real-time information about inventory and cost of goods sold, but may be more complex and expensive to maintain.
• Describe the key steps involved in determining the cost of goods sold using a periodic inventory system.
  • To determine the cost of goods sold using a periodic inventory system, the following steps are involved: 1) Conduct a physical count of the ending inventory at the end of the accounting period. 2) Calculate the cost of the ending inventory. 3) Subtract the ending inventory cost from the sum of the beginning inventory and purchases made during the period. The result is the cost of goods sold for that accounting period.
• Analyze the advantages and disadvantages of using a periodic inventory system compared to a perpetual inventory system in the context of merchandising, manufacturing, and service organizations.
  • The periodic inventory system is commonly used by merchandising and manufacturing organizations, as it allows them to track the cost of inventory and cost of goods sold. The key advantage of the periodic system is that it is simpler and less expensive to maintain than a perpetual system. However, the periodic system provides less real-time information about inventory levels and costs, and requires a physical count of the inventory, which can be time-consuming and prone to errors. In contrast, a perpetual inventory system offers more detailed and up-to-date information, but may be more complex and costly to implement. Service organizations, which typically do not have physical inventory, may find the periodic system more suitable for their needs, as it is less resource-intensive to maintain.

Related terms

Perpetual Inventory System: A perpetual inventory system continuously tracks inventory levels and costs, updating the records each time a sale or purchase occurs.

Cost of Goods Sold (COGS): The total cost of the inventory that has been sold during an accounting period, calculated as the beginning inventory plus purchases, less the ending inventory.

Inventory Valuation: The process of determining the monetary value of a company's inventory, which can be done using methods such as FIFO, LIFO, or weighted average cost.