{"id":1742,"date":"2020-08-31T20:56:02","date_gmt":"2020-08-31T20:56:02","guid":{"rendered":"https:\/\/www.shipbob.com\/au\/blog\/periodic-inventory-system\/"},"modified":"2024-11-20T22:57:02","modified_gmt":"2024-11-20T22:57:02","slug":"periodic-inventory-system","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/au\/blog\/periodic-inventory-system\/","title":{"rendered":"Periodic Inventory Systems: How It Works + Benefits Your Business"},"content":{"rendered":"\n<div class=\"wp-block-shipbob-blocks-single-toc single-toc\" data-controller=\"blog-toc-controller\" data-action=\"scroll@window-&gt;blog-toc-controller#scrollChanged:passive\" id=\"toc-component\"><div class=\"single-toc-overview\"><p>Table of Contents<\/p><div class=\"single-toc-read-time\"><p>** Minutes<\/p><\/div><\/div>\n<p><a href=\"#h-what-is-periodic-inventory\">What is periodic inventory?<\/a><\/p>\n\n\n\n<p><a href=\"#h-how-does-periodic-inventory-work\">How does periodic inventory work?<\/a><\/p>\n\n\n\n<p><a href=\"#h-how-do-you-calculate-periodic-inventory\">How do you calculate periodic inventory?<\/a><\/p>\n\n\n\n<p><a href=\"#h-what-are-the-advantages-of-using-a-periodic-inventory-system\">What are the advantages of using a periodic inventory system?<\/a><\/p>\n\n\n\n<p><a href=\"#h-what-are-the-drawbacks-of-using-a-periodic-inventory-system\">What are the drawbacks of using a periodic inventory system?<\/a><\/p>\n\n\n\n<p><a href=\"#h-think-beyond-periodic-inventory-tracking-with-shipbob\">Think beyond periodic inventory tracking with ShipBob<\/a><\/p>\n\n\n\n<p><a href=\"#\">Periodic inventory FAQs<\/a><\/p>\n<\/div>\n\n\n\n<p>There are many <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-valuation-methods\/\">inventory valuation methods<\/a> available for businesses to use, and picking the right valuation <a href=\"https:\/\/www.shipbob.com\/blog\/retail-inventory-method\/\">method<\/a> can have long-lasting effects. One of the more common and simplistic valuation methods is a periodic inventory system.<\/p>\n\n\n\n<p>Periodic inventory systems are commonly used by startups and small businesses, and you might be wondering if it\u2019s the right method for you. In this article, we\u2019ll take a look at what periodic inventory is, how to implement it, and how it can benefit your business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-periodic-inventory\">What is periodic inventory?<\/h2>\n\n\n\n<p>Periodic inventory is a system of inventory valuation where the business\u2019s inventory and <a href=\"https:\/\/www.shipbob.com\/blog\/cost-of-goods-sold\/\">cost of goods sold (COGS)<\/a> are not updated in the accounting records after each sale and\/or inventory purchase. Instead, the <span>income statement<\/span> is updated after a designated accounting period has passed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-does-periodic-inventory-work\">How does periodic inventory work?<\/h2>\n\n\n\n<p>In a periodic system, businesses don\u2019t keep a continuous record of each sale or purchase; inventory balance updates are only recorded in a purchases account over a specified period of time (e.g., each month, quarter, or year).<\/p>\n\n\n\n<p>At the end of the accounting period, the final inventory balance and COGS is determined through a <a href=\"https:\/\/www.shipbob.com\/blog\/physical-inventory\/\">physical inventory<\/a> count.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-what-is-the-difference-between-the-periodic-inventory-and-perpetual-inventory-systems\">What is the difference between the periodic inventory and perpetual inventory systems?<\/h3>\n\n\n\n<p>A periodic inventory system measures the level of inventory and cost of goods sold through occasional physical counts. In contrast, the <a href=\"https:\/\/www.shipbob.com\/blog\/perpetual-inventory-system\/\">perpetual inventory system<\/a> is a method that continuously monitors a business\u2019s inventory balance by automatically updating inventory records after each sale or purchase.<\/p>\n\n\n\n<p>The periodic inventory system is ideal for smaller inventories and order volumes, whereas fast-growing or midsize to large businesses usually resort to a perpetual system for more accurate and real-time records.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-do-you-calculate-periodic-inventory\">How do you calculate periodic inventory?<\/h2>\n\n\n\n<p>It\u2019s straightforward to calculate the cost of goods sold using the periodic inventory system. First, we\u2019ll walk through the elements needed and then an example.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Cost of Goods Sold (COGS) = (Beginning Inventory + Cost of Inventory Purchases) \u2013 Closing Inventory<\/p>\n<\/blockquote>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-periodic-inventory-formula\">Periodic inventory formula<\/h3>\n\n\n\n<p>As periodic inventory is an accounting method rather than a calculation itself, there is no formula. However, we will use the formulas for calculating cost of goods sold and cost of goods available.<\/p>\n\n\n\n<p>To calculate the cost of goods available, add the account total for purchases to the inventory\u2019s initial balance.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Cost of Goods Sold (COGS) = Cost of Goods Available \u2013 Closing Inventory<\/p>\n<\/blockquote>\n\n\n\n<p>Then, at the end of an accounting period, take a physical count of each item. This will be your ending inventory balance.<\/p>\n\n\n\n<p>Finally, subtract the ending inventory balance (or closing inventory) from the cost of goods available to determine the COGS.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Cost of Goods Available = Beginning Inventory + Purchases<\/p>\n<\/blockquote>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-a-periodic-inventory-example\">A periodic inventory example<\/h3>\n\n\n\n<p>Now we\u2019ll take a look at how you\u2019d practically apply periodic inventory to your business. Let\u2019s say you run an ecommerce store and:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>You start off with&nbsp; inventory worth $200,000.<\/li>\n\n\n\n<li>Your business spends $250,000 on inventory purchases over the accounting period.<\/li>\n\n\n\n<li>When you conduct a physical inventory count at the end of the period, your closing inventory is worth $100,000.<\/li>\n<\/ul>\n\n\n\n<p>As mentioned, we need to calculate the cost of goods sold using this formula:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p>Cost of goods sold (COGS) = Beginning inventory + Purchases \u2013 Closing inventory<\/p>\n<\/blockquote>\n\n\n\n<p>Plugging the values in, we get:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p>COGS = $200,000 + $250,000 \u2013 $100,000<\/p>\n\n\n\n<p>COGS = $350,000<\/p>\n<\/blockquote>\n\n\n\n<p>Using the periodic inventory method, the total cost of goods sold for the period comes to $350,000.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-the-advantages-of-using-a-periodic-inventory-system\">What are the advantages of using a periodic inventory system?<\/h2>\n\n\n\n<p>Periodic inventory allows a business to track its <a href=\"https:\/\/www.shipbob.com\/blog\/beginning-inventory\/\">beginning inventory<\/a> and ending inventory within an accounting period for their financial statements. Here are some of the ways it can benefit your business.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-easy-to-implement\">1. Easy to implement<\/h3>\n\n\n\n<p>Periodic inventory systems are relatively simple to implement as it requires fewer records than other valuation methods. The calculations are easy too.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2-great-option-for-small-business\">2. Great option for small business<\/h3>\n\n\n\n<p>A periodic inventory system is best suited for smaller businesses that don\u2019t keep too much stock in their inventory. For such businesses, it\u2019s easy to perform a physical inventory count. It\u2019s also far simpler to estimate the cost of goods sold over designated periods of time.<\/p>\n\n\n\n<p>That means companies with a high <a href=\"https:\/\/www.shipbob.com\/inventory-kpis\/inventory-turnover-ratio\/\">inventory turnover rate<\/a>, large SKU count, <a href=\"https:\/\/www.shipbob.com\/blog\/multichannel-inventory-management\/\">multichannel inventory management<\/a> needs, or that need real-time data are better suited for alternative methods.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-3-nbsp-requires-minimal-information\">3.&nbsp; Requires minimal information<\/h3>\n\n\n\n<p>While a perpetual system requires comprehensive information about each sale and purchase, periodic systems don\u2019t need to monitor each transaction. Periodic inventory systems are very simple in the world of <a href=\"https:\/\/www.shipbob.com\/blog\/ecommerce-guide-bookkeeping\/\">ecommerce bookkeeping<\/a> and can compute the cost of goods sold and available for small inventories using a few data points.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-the-drawbacks-of-using-a-periodic-inventory-system\">What are the drawbacks of using a periodic inventory system?<\/h2>\n\n\n\n<p>The <a href=\"https:\/\/www.shipbob.com\/blog\/periodic-automatic-replenishment\/\">periodic inventory system<\/a> can be risky for many businesses as stock levels are not up to date, leading to delays in issues being identified, <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-write-off\/\">inventory write-offs<\/a>, and major challenges with <a href=\"https:\/\/www.shipbob.com\/inventory-management\/inventory-forecasting\/\">inventory forecasting<\/a> as you don\u2019t always have exact figures on <a href=\"https:\/\/www.shipbob.com\/blog\/finished-goods-inventory\/\">finished goods inventory<\/a>, or the total stock available for customers to purchase.<\/p>\n\n\n\n<p>Periodic inventory can also be more prone to human error as it relies on physical <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-audit\/\">inventory audits<\/a> rather than a more automated system that\u2019s tracked digitally. By the time a physical count is completed, there may be <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-reconciliation\/\">inventory reconciliations<\/a> needed to address stock discrepancies. Recordkeeping in a periodic inventory system may also become more time-consuming as your business grows and you add more inventory items. You might want to consider <a href=\"https:\/\/www.shipbob.com\/blog\/ecommerce-accounting-software\/\">ecommerce accounting software<\/a> and automated methods, such as the perpetual inventory system, if your business is growing fast.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-think-beyond-periodic-inventory-tracking-with-shipbob\">Think beyond periodic inventory tracking with ShipBob<\/h2>\n\n\n\n<p>ShipBob pushes for a more accurate, real-time approach to <a href=\"https:\/\/www.shipbob.com\/inventory-management\/\">inventory management<\/a> by not only storing your inventory and picking, packing,a and <a href=\"https:\/\/www.shipbob.com\/blog\/kitting\/\">kitting<\/a> your orders but providing the tools needed to stay ahead.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-style-blog is-layout-flow wp-block-quote-is-layout-flow\">\n<p><i data-stringify-type=\"italic\">\u201cI felt like I couldn\u2019t grow until I moved to ShipBob. Our old 3PL was slowing us down. Now I am encouraged to sell more with them. My CPA even said to me, \u2018Thank God you switched to ShipBob.\u2019 ShipBob provides me clarity and insight to help me make business decisions when I need it, along with responsive customer support.\u201d <\/i><\/p>\n\n\n\n<p>Courtney Lee, founder of <a href=\"https:\/\/www.shipbob.com\/blog\/prymal\/\">Prymal<\/a><\/p>\n<\/blockquote>\n\n\n\n<p>ShipBob makes it easy to track <a href=\"https:\/\/www.shipbob.com\/inventory-kpis\/inventory-days-on-hand\/\">inventory days on hand<\/a> and other metrics like:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Historical stock levels at any point in time in any location<\/li>\n\n\n\n<li>Days left until a SKU will be out of stock<\/li>\n\n\n\n<li>Sales frequency across channels<\/li>\n\n\n\n<li>Product demand compared to previous periods<\/li>\n\n\n\n<li>Best-selling and slowest-moving items<\/li>\n\n\n\n<li>And much more<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-embed is-type-rich is-provider-embed-handler wp-block-embed-embed-handler wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"ShipBob Fulfillment Center Guided Tour - 3D 360\u00b0 VR Video\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/YdTbM4XlizY?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<p>Beyond periodic <a href=\"https:\/\/www.shipbob.com\/inventory-management\/inventory-tracking\/\">inventory tracking<\/a> features, ShipBob\u2019s world-class <a href=\"https:\/\/www.shipbob.com\/inventory-management\/software\/\">inventory management software<\/a> offers the ability to set up automatic <a href=\"https:\/\/www.shipbob.com\/blog\/reorder-quantity-formula\/\">reorder point<\/a> notifications that alert you when it\u2019s time to reorder specific SKUs. Click the button below to learn how our team can help with fulfilment for your ecommerce business.<\/p>\n\n\n\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.shipbob.com\/quote\/\"><strong>Request Fulfilment Pricing<\/strong><\/a><\/div>\n\n\n\n<section class=\"wp-block-shipbob-blocks-section-container section section-container  max-width-blog\" itemscope itemtype=\"https:\/\/schema.org\/FAQPage\"><div class=\"container section-info section-info-align-none \"><h6 class=\"section-title \"><\/h6><h2 class=\"section-content h2\">Periodic inventory FAQs<\/h2><p class=\"section-copy\">Here are some common questions that business owners have about periodic inventory systems with answers to give you some guidance.<\/p><\/div><div class=\"container flex-container direction-col justify-none align-none flex-wrap\">\n<div class=\"wp-block-shipbob-blocks-single-faq single-faq direction-col  col-8\" itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\" data-controller=\"faq-controller\" data-faq-controller-open-value=\"true\"><div class=\"single-faq-title-contianer\"><h4 itemprop=\"name\" class=\"single-faq-title\">What is a periodic inventory system?<\/h4><div class=\"single-faq-expand\" data-faq-controller-target=\"expand\"><img decoding=\"async\" src=\"\/wp-content\/themes\/shipbob-2022\/resources\/svg\/plus-solid.svg\"\/><\/div><\/div><div class=\"single-faq-childs\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" data-faq-controller-target=\"answer\"><div itemprop=\"text\">\n<p>A periodic inventory system is a method of inventory valuation where the account is periodically updated. In other words, the factor that determines changes to recorded inventory balance is not triggered by each new order but rather an overall time period.<\/p>\n<\/div><\/div><\/div>\n\n\n\n<div class=\"wp-block-shipbob-blocks-single-faq single-faq direction-col  col-8\" itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\" data-controller=\"faq-controller\" data-faq-controller-open-value=\"true\"><div class=\"single-faq-title-contianer\"><h4 itemprop=\"name\" class=\"single-faq-title\">How are periodic and perpetual inventory systems different?<\/h4><div class=\"single-faq-expand\" data-faq-controller-target=\"expand\"><img decoding=\"async\" src=\"\/wp-content\/themes\/shipbob-2022\/resources\/svg\/plus-solid.svg\"\/><\/div><\/div><div class=\"single-faq-childs\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" data-faq-controller-target=\"answer\"><div itemprop=\"text\">\n<p>A periodic inventory system measures the inventory levels periodically through physical counts. The perpetual method continuously updates inventory records after each sale or purchase, monitoring the inventory balance. Small business owners with less inventory benefit more from periodic systems than larger merchants.<\/p>\n<\/div><\/div><\/div>\n\n\n\n<div class=\"wp-block-shipbob-blocks-single-faq single-faq direction-col  col-8\" itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\" data-controller=\"faq-controller\" data-faq-controller-open-value=\"true\"><div class=\"single-faq-title-contianer\"><h4 itemprop=\"name\" class=\"single-faq-title\">How to do periodic inventory systems<\/h4><div class=\"single-faq-expand\" data-faq-controller-target=\"expand\"><img decoding=\"async\" src=\"\/wp-content\/themes\/shipbob-2022\/resources\/svg\/plus-solid.svg\"\/><\/div><\/div><div class=\"single-faq-childs\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" data-faq-controller-target=\"answer\"><div itemprop=\"text\">\n<p>To implement a periodic <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-accounting\/\">inventory accounting<\/a> system, all you need is a team to perform the physical inventory count and an accounting method for determining the cost of closing inventory. The LIFO (last-in first-out), <a href=\"https:\/\/www.shipbob.com\/blog\/fifo\/\">FIFO (first-in first-out)<\/a>, and the <a href=\"https:\/\/www.shipbob.com\/blog\/inventory-weighted-average\/\">inventory weighted average<\/a> methods are all promising calculation techniques.<\/p>\n<\/div><\/div><\/div>\n\n\n\n<div class=\"wp-block-shipbob-blocks-single-faq single-faq direction-col  col-8\" itemscope itemprop=\"mainEntity\" itemtype=\"https:\/\/schema.org\/Question\" data-controller=\"faq-controller\" data-faq-controller-open-value=\"true\"><div class=\"single-faq-title-contianer\"><h4 itemprop=\"name\" class=\"single-faq-title\">How to record periodic inventory systems<\/h4><div class=\"single-faq-expand\" data-faq-controller-target=\"expand\"><img decoding=\"async\" src=\"\/wp-content\/themes\/shipbob-2022\/resources\/svg\/plus-solid.svg\"\/><\/div><\/div><div class=\"single-faq-childs\" itemscope itemprop=\"acceptedAnswer\" itemtype=\"https:\/\/schema.org\/Answer\" data-faq-controller-target=\"answer\"><div itemprop=\"text\">\n<p>For the periodic inventory method, there\u2019s no need to continually record the inventory levels. Only the beginning and ending balances are needed, often completed by a physical count to calculate inventory value. Because updates are so infrequent in a periodic inventory system, no effort is made to keep real-time records of customer sales, inventory purchases, and the cost of goods sold.<\/p>\n<\/div><\/div><\/div>\n<\/div><div class=\"cta-container u-hidden\"><a class=\"btn btn-primary \" href=\"\"><\/a><\/div><\/section>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Learn all about the periodic inventory method including the benefits, downsides, how to calculate COGS using it, and more. <\/p>\n","protected":false},"author":110,"featured_media":1743,"parent":0,"template":"","meta":{"content-type":"","inline_featured_image":false,"footnotes":""},"blogcategories":[8],"class_list":["post-1742","blog","type-blog","status-publish","has-post-thumbnail","hentry","blogcategories-inventory"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.5 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What is a Periodic 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