Accounting on periodical basis
Periodic inventory is a system of inventory in which updates are made on a periodic basis. This differs from perpetual inventory systems, where updates are made as seen fit. In a periodic inventory system, no effort is made to keep up-to-date records of either the inventory or the cost of goods sold. Accountants do not update the ledger account inventory when the company purchases good to be sold. Instead of this, they debit the temporary account purchases. This account begins with a zero balance each year. The balance is removed to another account at the end of the year.
Periodic Inventory is suitable for the businesses that don’t need to accurately know current inventory levels on a daily basis. It is much more suitable for small businesses looking to keep low costs. A detailed inventory tracking is necessary for growing businesses and larger businesses and they typically choose a perpetual inventory system.
Benefits of Periodic Inventory System
The ease of implementation is one of the main benefits of periodic inventory system. It helps in lowering the cost. Less time is required to add periodic system to the business. A small business only requires a day or week worth of basic count to keep track of their inventory. This suggests that no complicated equipment is necessary.
There are some negatives to the periodic system:
- Errors in Estimation: You should estimate the cost of goods sold and which products are available in the periods between stock inventory. The total estimate of COGS will be different to the completed physical count.
- Significant Adjustments:There is no way to account for losses or obsolete goods in the periods between stock inventories. This can result in costly adjustments after your finish your physical count next time.
- Inability to Scale: This system does not give the ability to grow as it is based on the ability to track the goods. Ad you grow and add products to your inventory, the periodic system becomes more time-consuming.