Definition of Periodic Inventory

Periodic inventory is an accounting method that relies on physical counting of inventory at specific time intervals (monthly, quarterly, or annually) to determine remaining quantities and calculate cost of goods sold. It suits small and medium companies with diverse or low-value inventory, due to its simple implementation and low operating costs, but provides less accurate information and only reveals theft or damage during inventory counts.

Mechanism and Steps for Implementing Periodic Inventory

Implementing periodic inventory requires following organized steps to ensure accuracy and comprehensiveness in inventory counting and calculating cost of goods sold:

1. Set Inventory Date - Choose appropriate date and temporarily halt all sales and purchase operations
2. Prepare Tools - Prepare inventory lists, measuring devices, and train work teams
3. Organize Warehouse - Arrange goods and number locations to facilitate counting
4. Physical Count - Accurately count all items and record quantities in lists
5. Review and Audit - Verify accuracy of recorded data and recount when necessary
6. Cost Valuation - Multiply quantities by cost prices to calculate total value
7. Comparison - Compare results with accounting records and identify differences
8. Prepare Entries - Record ending inventory and calculate cost of goods sold
9. Documentation - Keep inventory lists and accounting entries for future review

Advantages and Disadvantages of Periodic Inventory System

Advantages of Periodic Inventory System

The periodic inventory system is characterized by simplicity in implementation and low operating costs, requiring no complex systems or daily inventory monitoring. It suits companies with diverse inventory and many items, providing flexibility in setting inventory dates according to entity needs, making it an economical choice for small and medium companies.

Disadvantages of Periodic Inventory System

The system suffers from not providing immediate inventory data and difficulty discovering theft and damage except during inventory counts. It requires halting commercial operations during counting, provides delayed information about cost of goods sold, and is prone to human errors in counting and recording, affecting financial data accuracy.

Difference Between Periodic and Perpetual Inventory

Periodic and perpetual inventory systems differ in several fundamental aspects that affect entities' choice of one over the other, and these differences can be seen in the following table:

Comparison Aspect	Periodic Inventory	Perpetual Inventory
Tracking Method	Periodic counting at specified intervals	Continuous tracking of inventory movement
Record Updates	Updates only during inventory	Immediate updates with each transaction
Calculation Timing	End-of-period calculation	Real-time cost calculation
Cost	Low	Relatively high
Accuracy Level	Lower accuracy	High accuracy
Information Availability	Delayed	Immediate
Theft Detection	Difficult to detect	Easy to detect
Work Disruption	Required	Not needed
Required Tools	Simple records	Advanced accounting systems
Suitable Usage	Small companies	Large companies