What is the difference between periodic and perpetual inventory systems?

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.]