Accounting. Online Accounting Help. Online Accounting. Online Accounting System. History of Accounting. General Accounting

Periodic Inventory System

A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both goods on hand and goods sold. It does not require continual updating of the inventory account. The com­pany records the cost of new merchandise in a temporary expense account called Purchases. When merchandise is soldi revenue is recorded but the cost of the merchandise sold is not yet recorded as a cost. When financial statements are prepared, the company takes a physical count of inventory by counting the quantities of merchandise on hand. Cost of merchandise on hand is determined by relating the quantities on hand to records showing each item’s original cost. This cost of merchandise on hand is used to compute cost of goods sold. The inventory account is then adjusted to reflect the amount computed from the physical count of inventory.

Periodic systems were historically used by companies such as hardware, drug, and department stores that sold large quantities of low-value items. Without today’s computers and scanners, it was not feasible for accounting systems to track such small items as pencils, toothpaste, paper clips, socks, and toothpicks through inventory and into customers’ hands.