Periodic inventory system

Definition

The periodic inventory system updates inventory balances and cost of goods sold (COGS) at the end of an accounting period. Unlike the perpetual system, it does not continuously track inventory transactions throughout the period.

5 Must Know Facts For Your Next Test

1. Inventory is physically counted at the end of each period to update records.
2. Cost of goods sold is calculated by adding purchases to beginning inventory and subtracting ending inventory.
3. Commonly used by small businesses due to its simplicity and lower cost compared to a perpetual system.
4. Purchases are recorded in a Purchases account rather than directly adjusting Inventory.
5. Less accurate on a day-to-day basis as it does not provide real-time updates on inventory levels.

Review Questions

• How does the periodic inventory system determine the cost of goods sold?
• Why might a small business prefer using a periodic inventory system over a perpetual one?
• What account is used to record purchases in a periodic inventory system?

Related terms

Perpetual Inventory System:

Continuously updates inventory records for each transaction involving inventory.

Cost of Goods Sold (COGS): The direct costs attributed to the production or purchase of the goods sold by a company.

Physical Inventory Count: A process where actual physical counts of all merchandise are taken to update records, typically used in periodic systems.