Business Accountants: Periodic Inventory System: Usage and Benefits

WELLINGTON, New Zealand - July 19, 2023 - PRLog -- To ensure efficient business operations, inventory management is crucial. With advancements in technology, businesses now have the capability to track inventory in great detail, including real-time stock counts and AI-based forecasts.

However, for small businesses and entrepreneurs, it's important to strike a balance between advanced inventory management systems and simplicity. This is where the periodic inventory system comes into play, offering an easy-to-implement and cost-effective alternative. Let's explore what it is and how and when to use it.

What is a Periodic Inventory System?

A periodic inventory system involves conducting a physical inventory count at the end of a specific accounting period, typically yearly, quarterly, or monthly. This approach provides a predetermined schedule for physically counting inventory and calculating important accounting metrics, such as the cost of goods sold (COGS).

The primary goal of an inventory system is to determine the quantity of stock on hand and facilitate the calculation of the cost of goods sold. The cost of goods sold represents the direct expenses associated with the sold products, including raw materials and labor. This metric is essential for financial reporting purposes, particularly on the income statement.

How the Periodic Inventory System Works

When using a periodic inventory system, several metrics are tracked and utilized: beginning inventory, purchases, and ending inventory. Here's a closer look at each:

1. Beginning Inventory: The total monetary value of inventory at the start of the accounting period.
2. Purchases: The amount spent on acquiring new inventory during the accounting period.
3. Ending Inventory: The monetary value of inventory remaining at the end of the accounting period.

The following steps outline the process of using a periodic inventory system:

1. Record the value of beginning inventory.
2. Keep track of inventory purchases throughout the accounting period.
3. Sum up all individual purchase amounts to calculate the total purchases.
4. Physically count and tally the number of units remaining in inventory at the end of the accounting period.
5. Determine the monetary value of the ending inventory (refer to inventory valuation methods for more details).
6. Calculate the cost of goods available for sale.
7. Calculate the cost of goods sold.

To calculate the cost of goods available for sale, use the formula:

Cost of Goods Available = Beginning Inventory + Purchases

And to calculate the cost of goods sold, apply the following formula:

Cost of Goods Sold (COGS) = Cost of Goods Available – Ending Inventory

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