What is the difference between periodic and perpetual inventory systems?

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.

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