Periodic Inventory

Definition

Periodic inventory is an inventory valuation method where a business counts and records its inventory at the end of an accounting period. This method is used to determine the cost of goods sold and the value of ending inventory for financial reporting purposes.

5 Must Know Facts For Your Next Test

1. Periodic inventory requires a physical count of all inventory items at the end of an accounting period to determine the ending inventory balance.
2. The cost of goods sold under the periodic inventory method is calculated as beginning inventory plus purchases minus the ending inventory balance.
3. Periodic inventory is less accurate than perpetual inventory, as it does not track inventory changes throughout the accounting period.
4. Periodic inventory is simpler to implement than perpetual inventory, as it only requires a single inventory count at the end of the period.
5. Businesses that use periodic inventory must make adjustments to their accounts at the end of each period to reflect the actual inventory on hand.

Review Questions

• Explain how the periodic inventory method is used to determine the cost of goods sold.
  • Under the periodic inventory method, the cost of goods sold is calculated as the beginning inventory balance plus any purchases made during the period, minus the ending inventory balance. This requires a physical count of all inventory items at the end of the accounting period to determine the final inventory value. The cost of goods sold is then used to calculate the gross profit for the period.
• Describe the key differences between the periodic inventory and perpetual inventory systems.
  • The primary difference between the periodic and perpetual inventory systems is the timing and accuracy of inventory tracking. Perpetual inventory systems continuously update inventory records with each purchase and sale, providing real-time inventory information. In contrast, the periodic inventory system only records inventory at the end of an accounting period, based on a physical count. While perpetual inventory is more accurate, the periodic system is simpler to implement and maintain.
• Analyze the advantages and disadvantages of using the periodic inventory method compared to the perpetual inventory method.
  • The main advantage of the periodic inventory method is its simplicity, as it only requires a single physical count at the end of the accounting period. This makes it less time-consuming and costly to implement than the perpetual system. However, the periodic method is less accurate, as it does not track inventory changes throughout the period. This can lead to discrepancies between the recorded inventory and the actual inventory on hand. Perpetual inventory, on the other hand, provides real-time inventory data, but requires more complex record-keeping and systems. The choice between the two methods depends on the size and complexity of the business, as well as the desired level of inventory control and accuracy.

Related terms

Perpetual Inventory: A system where a business continuously tracks inventory levels and costs, updating the records with each purchase and sale.

Cost of Goods Sold (COGS): The total cost of inventory items that were sold during an accounting period, calculated as beginning inventory plus purchases minus ending inventory.

Inventory Turnover: A ratio that measures how quickly a company sells and replaces its inventory, calculated as cost of goods sold divided by average inventory.