Periodic Inventory System How Does It Work?
There are many types of inventory systems used in companies, and the periodic inventory system is one of the systems used by some companies. In general, every company needs to know what it has in stock of the products or raw materials it uses; to learn how to manage it appropriately in line with the volume of demand for its products in the market. Thus, avoiding a sudden shortage or a large surplus that becomes useless, each organization uses the inventory system that is best for it. In this article, we will discuss the most important information about the periodic inventory system, as well as its advantages and the most important disadvantages.
What Is Periodic Inventory?
It is the inventory method by which inventory is taken at the end of each year, or when the company’s statement of financial position is prepared.
The periodic inventory is concerned with the actual inventory of the inventory, not just the book inventory, meaning that the number of quantities actually in the stores is counted and counted at the cost.
What is a Periodic Inventory System?
As for the periodic inventory system, it is one of the software systems that supports periodic inventory taking.
The company enters its inventory numbers into the periodic inventory system, then the system performs the initial review of the goods and reconciles the different data.
This system supports the current inventory keeping method, through which updated inventory lists can be obtained and printed, as well as the ability to calculate any data you want and settle inventory for new periods.
Periodic Inventory Accounting
And speaking of how to calculate the periodic inventory, there is a basic mathematical formula that is used in accounting for the periodic inventory. The main objective of that formula is to determine the cost of goods sold as well as the change in inventory each time period. The following is the accounting formula for periodic inventory:
- Closing Inventory = (Purchases + Beginning Inventory) − Cost of Goods Sold
Periodic Inventory System Advantages and Disadvantages
There are pros and cons to the periodic inventory system. Although it is easy and inexpensive, as we have indicated, it uses minimal information.
Also, through this system, you do not collect and disclose data in real time. And below we will discuss the most important advantages and disadvantages of the periodic inventory system:
1. The Advantages of Periodic Inventory System
Here are the main advantages of a periodic inventory system:
Simplicity, where this type of inventory is characterized by its simplicity, as it performs the inventory process through simple steps and with fewer calculations.
Low cost. In this method of inventory, you count the inventory at regular intervals, without the need to purchase sophisticated inventory control software, which has a high cost.
2. The Disadvantages of Periodic Inventory System
On the other hand, there are a number of serious drawbacks to this method of inventory, the most important of which are as follows:
Slow processing, because updating the periodic inventory system occurs after a specific period of time, and thus the process of tracking goods is difficult.
It may also not be suitable in some industries that need to modernize faster, such as clothing, as this system may negatively affect the revenues of that industry.
The Benefits of a Periodic Inventory System
The periodic inventory system has many benefits and this is probably the main reason why most companies rely on it as one of their primary inventory methods.
Especially since the periodic inventory system is characterized by its ease of implementation and its low cost, in addition to not requiring a large number of employees to deal with this type of inventory system.
The periodic inventory system is particularly suitable for small businesses, and by doing a basic count of their inventory on a daily or weekly basis, they can get a proper indicator of their inventory performance.
