Difference Between Periodic LIFO and Perpetual LIFO
The difference between periodic LIFO and perpetual LIFO involves the time at which the latest inventory costs are removed from the inventory account:
- With periodic LIFO, the latest costs are assumed to be removed from inventory at the end of the accounting year
- With perpetual LIFO the latest costs are removed from inventory at the time of each sale.
Example of Difference Between Periodic LIFO and Perpetual LIFO
Assume that a company's accounting year is January 1 through December 31 and the company sells only one type of product. In its beginning inventory are 2 units with a cost of $10 each. The company sells 1 unit on March 1. On April 1, the company purchases 5 units at a cost of $11 each. On September 1, the company sells 3 units. In summary, the company had 2 units on January 1, purchased 5 units on April 1, sold 4 units during the year, and has 3 units on hand at December 31.
With periodic LIFO the costs of the latest purchases starting with the end of the year are removed first. Since 4 units were sold during the year, the costs removed from inventory and charged to the cost of goods sold will be the last cost of 4 units, which is $11 each. This means the cost of its December 31 inventory using periodic LIFO will be $31 (1 unit at $11 plus 2 units at $10).
With perpetual LIFO the costs of the latest purchases as of the date of each sale are removed first. On March 1, the latest cost at that time for the 1 unit sold was $10. At the time of the sale on September 1, the latest cost of the 3 units sold was $11 each. Using perpetual LIFO, the company's cost of goods sold will be $43 (1 at $10 and 3 at $11), and its inventory will be reported at a cost of $32 (2 units at $11 and 1 unit at $10).