Periodic Inventory System: Definition, Smart Solutions, Benefits for Your Business

The periodic inventory system is an effective method for managing inventory that offers simplicity and cost-efficiency, especially for small businesses. By conducting physical inventory counts at regular intervals, businesses can easily track inventory levels and determine the cost of goods sold. This system minimizes the need for continuous updates, making it a popular choice for companies looking to reduce overhead costs. Worldcraft Logistics invites you to read the article we shared to learn more about how this method can benefit your business.

What is periodic inventory?

The periodic inventory system is an inventory valuation method used for financial reporting in which a physical count of inventory is conducted at regular intervals, such as monthly, quarterly, or annually. This accounting method involves determining the beginning inventory at the start of a period, adding any new inventory purchases made during the period, and then subtracting the ending inventory at the end of the period to calculate the cost of goods sold (COGS).

How does periodic inventory work?

In a periodic inventory system, businesses do not maintain real-time records of sales or inventory changes. Instead, inventory updates are logged in a separate purchases account throughout a defined period, such as a month, quarter, or year.

At the end of the period, a physical inventory count is conducted to calculate the ending inventory and determine the cost of goods sold (COGS). This approach simplifies inventory tracking but lacks real-time accuracy.

How do you calculate periodic inventory? The correct formula is used

The periodic inventory system formula is used to calculate the Cost of Goods Sold (COGS) and is as follows:

COGS = Beginning Inventory + Purchases - Ending Inventory

This formula provides a clear method for determining the value of inventory sold during a specific period.

Components of the Formula:

• Beginning Inventory: The total inventory value at the start of the period.
• Purchases: The cost of new inventory acquired during the period, including any additional costs such as shipping or taxes.
• Ending Inventory: The total inventory value remaining at the end of the period, determined through a physical count.

The periodic inventory system formula simplifies inventory management for businesses by providing a straightforward way to calculate COGS. Through examples, it is clear that the formula accurately tracks inventory usage over any defined accounting period.

Periodic inventory system example​

Here are three periodic inventory system examples to demonstrate how different businesses can apply the periodic inventory method:

Example 1: Grocery Store

• Scenario: A small grocery store uses a periodic inventory system to manage its stock of food items.
• Beginning Inventory: $8,000 (the value of inventory at the start of the month)
• Purchases: $4,500 (new stock purchased during the month)
• Ending Inventory: $3,500 (calculated through a physical count at the end of the month)

Calculation of Cost of Goods Sold (COGS):

COGS = Beginning Inventory + Purchases - Ending Inventory

COGS = $8,000 + $4,500 - $3,500 = $9,000

➡️ Conclusion: The grocery store calculates that $9,000 worth of inventory was sold during the month. The periodic inventory system is sufficient because the grocery store doesn’t need real-time tracking of inventory and can focus on overall monthly inventory updates.

Example 2: Clothing Boutique

• Scenario: A clothing boutique sells fashion items and uses a periodic inventory system. It has a higher turnover rate for items like seasonal clothing.
• Beginning Inventory: $20,000 (value of remaining stock at the start of the month)
• Purchases: $12,000 (new inventory bought during the month)
• Ending Inventory: $15,000 (determined by a physical count at the end of the month)

Calculation of Cost of Goods Sold (COGS):

COGS = Beginning Inventory + Purchases - Ending Inventory

COGS = $20,000 + $12,000 - $15,000 = $17,000

➡️ Conclusion: In this case, the clothing boutique sold $17,000 worth of inventory during the month. Since the business focuses on high-value, low-volume products, the periodic system is a cost-effective method to track sales without the need for constant inventory updates.

Example 3: Electronics Store

• Scenario: An electronics store sells gadgets and uses a periodic inventory system for managing its inventory of computers, phones, and accessories.
• Beginning Inventory: $50,000 (value of inventory at the start of the quarter)
• Purchases: $25,000 (new inventory purchased during the quarter)
• Ending Inventory: $35,000 (calculated by physical count at the end of the quarter)

Calculation of Cost of Goods Sold (COGS):

COGS = Beginning Inventory + Purchases - Ending Inventory

COGS = $50,000 + $25,000 - $35,000 = $40,000

➡️ Conclusion: For this electronics store, the total COGS for the quarter is $40,000, which represents the inventory sold during the period. Despite the higher inventory value and complex items, the periodic inventory system is a simple and effective method for this type of business, especially as it’s not required to track sales and purchases in real-time.

Summary:

✔️ Grocery Store: $9,000 COGS

✔️ Clothing Boutique: $17,000 COGS

✔️ Electronics Store: $40,000 COGS

Each example highlights how the periodic inventory system works across different industries, providing a clear way to track and manage inventory without the need for real-time updates.

What are the advantages and drawbacks of using a periodic inventory system?