Periodic Inventory System
In a periodic system the account Inventory:
- Has only the ending balance from the previous accounting year
- Excludes the cost of purchases, purchases returns and allowances, etc. since these are recorded in accounts such as Purchases, Purchases Returns and Allowances, Purchases Discounts, etc.
- Must be adjusted at the end of the accounting year in order to report the costs actually in inventory
- Requires a physical inventory at least once per year and estimates within the year
- Requires a cost flow assumption (FIFO, LIFO, average)
The periodic inventory system requires a calculation to determine the cost of goods sold.
Perpetual Inventory System
In a perpetual system the account Inventory:
- Is debited whenever there is a purchase of goods (there is no Purchases account)
- Is credited for the cost of the items sold (and the account Cost of Goods Sold is debited
- Has a continuously or perpetually changing balance because of the above entries
- Requires a physical inventory to correct any errors in the Inventory account
- Requires a cost flow assumption (FIFO, LIFO, average)
With the perpetual inventory system, the cost of goods sold is readily available in the account Cost of Goods Sold.
[It is possible that a company uses the periodic system in its general ledger, but uses a different computer system outside of its general ledger to track the flow of goods in and out of inventory.]
