The difference between the periodic and perpetual inventory systems involves the general ledger account Inventory.
In a periodic system the account Inventory will:
- have a constant balance (the ending balance from the previous period)
- not include the cost of purchases (they are recorded in a Purchases account)
- be adjusted at the end of the accounting period (so the balance reports the costs actually in inventory)
- require a physical inventory at least once per year (and estimates within the year)
- require a cost flow assumption (FIFO, LIFO, average)
- require a calculation of the cost of goods sold (to be used on the income statement)
In a perpetual system the account Inventory will:
- be debited when there is a purchase of goods (there is no Purchases account)
- be credited for the cost of the items sold (and the account Cost of Goods Sold will be debited)
- have its balance continuously or perpetually changing because of the above entries
- require a physical inventory to correct any errors in the Inventory account
- require a cost flow assumption (FIFO, LIFO, average)
It is possible that a company will use the periodic system in its general ledger and use a different computer system outside of its general ledger to track the flow of goods in and out of inventory.
