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Periodic Inventory System: What Is It, How It Works, Applications, And More

Periodic Inventory System

The periodic inventory system is the method through which a business does a valuation of its inventory. Here, the business updates its inventory account at the end of each accounting period and not after each sale, wholesale, or purchase. The main advantage of this system is that it helps the business track its beginning and ending inventory within an accounting period.

In this article, you will learn about what a periodic inventory system is in general. Apart from that, you will also learn how a period inventory system works. In addition to that, you will also learn the difference between a periodic inventory system and a perpetual inventory system. Finally, you will learn how to use such a system in your business model. Hence, to learn more about this system, read on through to the end of the article.

What Is A Periodic Inventory System?

What Is A Periodic Inventory System

Investopedia defines –

“The term periodic inventory system refers to a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals. As an accounting method, periodic inventory takes inventory at the beginning of a period, adds new inventory purchases during the period, and deducts ending inventory to derive the cost of goods sold (COGS).”

The best thing about a periodic inventory system is that it is easier to implement. Apart from that, it is also a cost-effective option for companies that are usually small in size. Another major advantage of a period inventory system is that it helps the business manage risks in the supply chain better.

It is an accounting technique where the accountant updates the count of the physical inventory at specific intervals. One can execute a period inventory count monthly, quarterly, and annually. Here, the accountant does not update the account regularly or after each sale of products and services.

However, this system of accounting is a great option for small businesses only. When it comes to larger companies, they use the perpetual inventory system. Here, the companies update their inventory lists regularly (or after each sale).

How Does A Periodic Inventory System Work?

The inventory of a business is nothing but the goods that the company has in its hand, and it can make them available for sale. In general cases, a business holds inventory in the normal course of business. Furthermore, the inventory is also one of the most valuable assets of the business. This is because those inventories create the primary source of revenue for the business.

According to FreshBooks.com,

“In a periodic inventory system, no continuous record of changes is kept. The yearly inventory purchases are recorded in the purchases account, which is a ledger listing all inventory purchases and their costs. At the end of the year, a physical inventory count is done to determine the ending inventory balance and the cost of goods sold.”

In this accounting system, the business keeps a physical count of inventory at certain periods of time. With the periodic inventory system, the time is mostly monthly, quarterly, or annually. This means that the company that uses this system tracks its inventory at hand both at the beginning and the end of a specific accounting period.

Here, the company does not track its inventory on a regular basis or during sales. With this inventory system, the company also finds it easier to track the costs of all the goods sold. This inventory updating system is popular among smaller companies that do not have the necessary tools and manpower to conduct regular updates of inventory. Also, these companies have smaller quantities of inventory.

Periodic Inventory System Vs. Perpetual Inventory System

In the periodic inventory system, the company does not have full information regarding its levels of inventory. Apart from that, it also does not know all the costs of goods sold until the completion of the physical count process.

Hence, this system is the best option for businesses that have a smaller number of stock-keeping units (SKUs). Furthermore, the company also needs to operate in a market that plods. In other cases, the perpetual inventory system is a better option for all.

The following are the major differences between a periodic inventory system and a perpetual inventory system:

  • The perpetual inventory system updates the inventory asset ledger on a regular basis or after each sale. As a result, the management gets an instant view of the inventory. On the other hand, the periodic inventory system is more time-consuming and does not get updated information.
  • With the help of the perpetual system, the company can always keep its COGS updated. On the other hand, the periodicity of the periodic system makes it less useful when it comes to staying updated.
  • The perpetual system tracks individual items in the inventory. Hence, it is easier to locate defective items quickly. However, the periodic system does not help in this regard.

When To Use A Periodic Inventory System?

According to Netsuite.com,

“Any business can use a periodic system since there’s no need for additional equipment or coding to operate it, and therefore it costs less to implement and maintain. Further, you can train staff to provide simple inventory counts when time is limited, or you have high staff turnover.”

However, the periodic system is most suitable for small companies with a low number of SKUs. This is because such a business is not concerned fully about scaling its business at the given moment. Apart from that, based on your needs and the types of products you deal with, you can use a periodic system along with a perpetual inventory system.

Furthermore, if you have good control of your supply chain system and you sell only a few products, then the periodic system is the better option for you.

Wrapping Up

The periodic inventory system is the best option for only those companies that deal with only small quantities of goods. Apart from that, companies that are not looking for scale at the moment and have only a limited number of employees must use this inventory accounting system.

Do you have more suggestions on how to use the best inventory accounting system? Consider sharing your ideas and opinions with us in the comments section below.

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Soumava Goswami

A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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Some of the key factors that you should be well aware of are as follows: - Specifications And Features Of AO Seed X Maker Are As Follows:-  The application of the technology is FDM in this printer. The build volume of this printer is 150x150x150mm (about 5.91 in). Soft PC magnet heated is the build platform of this 3D printer. You will get a 3.5-inch touchscreen interface on this printer. Use USB and Wi-Fi while connecting to this printer. Factory Set is semi-automatic at the time of the Bed leveling. 12. Anycubic Photon Mono M5 S When it comes to printing in detail, Anycubic Mono photon M5s are the best options for you. It offers a whopping 12K resolution that can make things easier for you to attain your requirements. The application of the 19 Micron X accuracy can make things easier for you. It can print 3.5-inch models within an hour. Furthermore, it will suit your budget as well. However, try to meet your needs with ease. Specifications And Features Of Anycubic Photon Mono M5 S Are As Follows:- The application of the technology is Resin in this printer. The complete build volume of this Anycubic photon is 218x123x200mm. The LCD size of this printer is 10.5-inch monochrome. XY resolution of this printer is 19x24 Michrons. You will receive the auto-leveling feature here. This printer comprises smart sensors. 13. Snapmaker Artisan 3 in 1 Snapmaker Artisan 3 in-1 is another one of the best 3-D printers that can make things easier for you. Some of the key factors that you should consider here are laser engraving, CNC carving, and 3D printing. Ensure it is the best printer as per your needs. Specifications And Features Of Snapmaker Artisan 3 In 1 Are As Follows: - The technology that it makes use of is FDM, Laser engraver, and CNC. The build in volume of this best 3D printer is 400x400x400mm (about 1.31 ft). It comprises a color touchscreen interface. You can build the connectivity using USB sticks and Wi-Fi. 14. Elegoo Neptune 3 Max Elegoo Neptune is one of the best 3D printers that you can make use of in 2024. It comprises of these features that can make your job easier. Some of the key features of this printer are as follows: - Specifications And Features Of Elegoo Neptune 3 Max Are As Follows: - The technology that it makes use of is FDM. The complete build volume of this Elegoo is 420x420x500mm (about 1.64 ft). It comprises a color touch screen and is removable. The complete connectivity is USB Type A, Complete connectivity. 15. CR-10 Max CR -10 Max is another quality 3D printer that can make things easier for you in the long run. It is one of the best 3D printers that you can use while attaining your printing needs. Specifications And Features Of CR -10 Max Are As Follows:- The technology that it makes use of is FDM. Printing Size: 450mm (about 1.48 ft) x 450mm (about 1.48 ft) x 470mm (about 1.54 ft). The Aluminum V-slot extrusions for stability.  Typically reaches temperatures up to 260°C.  Final Take Away Hence, these are some of the best 3D printers that you can look at from your end while attaining your requirements. The best part is the features and benefits that you will receive from these printers, which can make your life easier. You make your comments in the comment box. It will help us to know your take on this matter. Once you follow the best process, things can become simpler for you in the long run. Try to maintain the process with ease. Before making a purchase, consider your specific needs, such as print volume, materials compatibility, and your budget. Additionally, check for the latest models and reviews to ensure that you are getting the most up-to-date information. Read More For More Business Related Article: How Digital Marketing Consultant Can Help Your Business In 2023? How To Become A Strategy Consultant? 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