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What is the difference between periodic and perpetual inventory systems?

Author:
Harold Averkamp, CPA, MBA

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.]

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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