Periodic Inventory System Definition
A periodic inventory system is an inventory control method that involves counting the number of units on hand at regular intervals. The interval can be as short as a day or as long as a year. This method is very common in many industries, especially those that produce perishable products or have high labor costs. These businesses often don’t have the resources to count every single unit continuously, so they use periodic inventory systems instead. Additionally, small businesses with lower inventory levels use it often because expensive software isn’t worth it for them.
How Does a Periodic Inventory System Work?
The basic principle behind periodic inventory systems is that you record the value of an asset at its original price when it was purchased. After that, you record any increases or decreases in value over time. At some point during the year, you will conduct a physical count of your assets and compare that number to what you have on paper. Any difference between these two numbers will be recorded as either an increase or decrease in value.
When Should You Use a Periodic Inventory System?
Periodic inventory systems should mostly be used when you need more frequent updates (every day, every week) of your inventory than what a perpetual system provides. Another scenario is that you have high levels of turnover in your inventory, for example, during specific seasons. However, they are also used by businesses with large inventories, like warehouses and retail stores.
Advantages of a Periodic Inventory System
The main advantage of using a periodic inventory system is that it allows businesses to reduce their inventory costs by reducing the amount of time they spend counting items. This reduces labor costs and makes it easier for employees to focus on other tasks. It also makes it easier for managers to make accurate estimates about how much merchandise they will need in the future without having to invest in expensive equipment or software.
It also ensures that you don’t overuse the same items or understock certain ones. Additionally, you can track how much money you’ve spent on each item, which can help you plan for future inventory purchases.
Disadvantages of a Periodic Inventory System
A disadvantage of periodic inventory systems is that they can cause problems if you don’t know exactly how much merchandise you’ll need to have in stock. If you order too many units, your excess inventory could end up costing money if it goes bad before you can sell it. Conversely, if you don’t order enough units, your customers might not be able to find what they need in-store/ online.
How are periodic and perpetual inventory systems different?
Perpetual count systems use a continuous record to determine inventory value, while periodic count systems are noncontinuous. The perpetual system updates itself automatically at regular intervals. For example, if you’re using an accounting software like Quickbooks, your balance sheet updates itself automatically.
This is in contrast to a periodic inventory system, where you count inventory manually at the end of a fixed period. Basically, you won’t know how many products are left until you count the “closing inventory”.