Perpetual vs Periodic Inventory: What’s the Difference?

At the end of this article, we will compare the Perpetual and Periodic Inventory to give you a clearer picture. But if you have a periodic inventory system, you will have to call your warehouses and tell them to find that jacket and ship it. Well, if you are managing your inventory perpetually, all you have to do is just sit and chill because the warehouse having that jacket will get the notification about the order.

The cost of goods sold for the entire year then is determined by a short computation. A periodic inventory system does not keep continuous track of ending inventories and the cost of goods sold. Instead, these items are determined at the end of each quarter, year, or accounting period.

Perpetual FIFO

Companies do not record their unique sales during the period to debit but rather perform a physical count at the end and from this reconcile their accounts. A perpetual inventory system is a software system that continuously collects data about a company’s products. A perpetual system tracks every transaction as it happens, including purchases and sales. The system also tracks all information pertinent to the product, such as its physical dimensions and its storage location.

The term periodic inventory system refers to a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals. As an accounting method, periodic inventory 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). It is both easier to implement and cost-effective by companies that use it, which are usually small businesses. The above article has put in front of you a detailed explanation of both perpetual and periodic inventory methods.

Formulas in Perpetual Inventory Method

Companies would normally use a periodic inventory system if they sell a small quantity of goods and/or if they don’t have enough employees to conduct a perpetual inventory count. Small businesses, art dealers, and car dealers are several examples of the types of companies that would use this accounting method. A periodic inventory system is an accounting method where inventory tracking is updated manually at the end of a specific period. Properly managing bookkeeping for startups inventory can make or break a business, and having insight into your stock is crucial to success. While the periodic method is acceptable for companies that have minimal inventory items or small businesses, those companies that plan to scale will need to implement a perpetual inventory system. Regardless of the type of inventory control process you choose, decision makers need the right tools in place so they can manage their inventory effectively.

• The periodic inventory system is a method used to account for inventory that doesn’t track individual items but instead relies on physical counts conducted at set intervals.
• Problems, such as a quality issue, can be spotted sooner and resolved before it impacts a large number of customers.
• Then, at the end of an accounting period, take a physical count of each item.
• There are two ways in which a company may account for their inventory.
• Some small businesses may also choose the periodic system because of its affordability.
• Record your total discount in your journal by combining the inventory sales and the sales discount entries.