Periodic Inventory System —
Everything You Should Know
This article will discuss what periodic inventory is and when you should use it. Additionally, we will discuss what a periodic inventory system is and the benefits you can gain from it.
Once you are done reading this article, you will be able to have a deeper understanding of the periodic inventory system. Thus, it will allow you to only use this method when it is suitable for your business.
Periodic Inventory: What is it?
Periodic inventory is a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is conducted at specific intervals.
It is an accounting technique that involves taking an inventory at the start of a specific period, adding any new inventory acquired during that period, and then subtracting the value of the inventory remaining at the end of that period to arrive at the cost of goods sold (COGS).
To know the year-end inventory balance using the periodic inventory system, a business conducts a physical count of its stock.
For interim periods such as monthly or quarterly reports, estimates are often used. Rather than updating the general ledger account inventory when goods are purchased for resale, accountants record the transaction by debiting a temporary account for purchases.
At the start of each year, this temporary account has a zero balance, and at year-end, the balance is transferred to another account.
Furthermore, a periodic inventory system may be adopted by companies that are just starting due to limited employee resources to conduct frequent inventory counts. However, as the company expands, it may switch to a perpetual inventory system as its workforce grows.
When Should You Use it?
Small businesses that lack sufficient staff to carry out frequent inventory counts usually utilize periodic inventory.
These businesses often rely on manual inventory counting, without the need for accounting software. As a result, periodic inventory is frequently employed by businesses that deal in low volumes of inventory, such as art and auto dealers.
All in all, a periodic inventory system is typically employed by companies that sell limited quantities of goods or have insufficient personnel to carry out a perpetual inventory count.
Examples of such businesses that utilize this accounting method include small enterprises, art dealers, and car dealerships.
Periodic Inventory System: What is it?
A periodic inventory system is software that enables companies to conduct periodic physical counts of their stock.
Initially, the company may perform a physical review of its goods and import the stock data into the software for reconciliation.
These software systems support a variety of stock-keeping methods, allowing users to obtain inventory lists in paper format and import stock data for calculating inventory order needs and reconciliation for a new period.
The resulting figures and reports can be exported to accounting software. The selection of inventory software is determined by a company’s specific requirements and product needs.
When to Use it?
A small company with a limited number of stock-keeping units (SKUs) may utilize a periodic system when scalability is not a concern. Additionally, a periodic system can be used in conjunction with a perpetual system based on the nature of the products and business needs.
Since no additional equipment or coding is required, any business can utilize a periodic system, resulting in lower implementation and maintenance costs.
Moreover, simple inventory counts can be conducted by trained staff when time is limited or there is high employee turnover.
A periodic system is appropriate for businesses with a well-established supply chain process, a limited range of products, and close monitoring of goods.
However, it may not be suitable for identifying missing inventory or reconciling discrepancies, which can become more challenging to manage as a business expands.
Benefits of Periodic Inventory System
The primary advantages of using a periodic inventory system are its implementation, lower cost, and reduced staffing requirements.
Incorporating a periodic system into a business requires not much time and effort. Simple manual counts on paper may be adequate for collecting product data, particularly if the number of goods sold is limited.
For small businesses, conducting a basic count once a day or week is usually sufficient to keep track of inventory. This is much cheaper than integrating a computer system that manages your inventory at all times.
Disadvantages of Periodic Inventory System
1. Unknown Stock Levels
In a periodic inventory system, inventory is not continuously monitored or tracked in real-time. Instead, it is assessed periodically, usually on a monthly or quarterly basis, through physical inventory counts.
This infrequent monitoring leaves a gap in time where changes in inventory, such as theft, damage, misplaced items, or exchanges of defective products, can occur without immediate detection until the next inventory count. The lack of regular tracking and real-time visibility makes it difficult to promptly identify and address these issues.
2. Possible Revenue Loss
In a periodic inventory system, it can be challenging to detect inventory shrinkage caused by theft, damage, or misplaced items due to employee error. It is also possible for losses resulting from defective products being exchanged to go unnoticed.
When we lack knowledge about warehouse operations, we expose ourselves to potential revenue losses that are hard to identify without closely tracking current inventory levels and monitoring the inflow and outflow of items.
3. Lack of Detail
Infrequent determination of inventory levels, typically on an annual basis, can lead to errors and missed opportunities.
For instance, conducting inventory checks only once a year results in a lack of detailed information, making it challenging to identify and reduce factors that contribute to inventory costs, such as shipping, purchasing, and handling expenses.
Additionally, due to the lack of detail, potential opportunities like seasonal increases in demand may go unnoticed.
+ What is periodic inventory?
It is a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is conducted at specific intervals.
+ What is the periodic inventory system?
It is software that enables companies to conduct periodic physical counts of their stock.
+ When is it suitable to use?
It is much more suitable for businesses that sell limited quantities of goods or have insufficient personnel to carry out a perpetual inventory count.
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