A periodic inventory system is a mechanism for measuring the level of inventory and the cost of goods sold (COGS) by using an occasional physical count. Periodic systems use regular and random inventory audits to update inventory-tracking information. Typically, the physically counted inventory on hand is compared to sales and receipt data to identify any discrepancies.
Periodic inventory systems were more widely used before computers made real-time inventory management more efficient. Conducting periodic counts requiring that each item in stock be tallied by hand can be time-consuming and tedious. Companies using this method often have to shut some or all their business down while the count is under way.
How periodic inventory systems work
In periodic inventory systems, merchandise purchases are recorded in a purchases account, a ledger listing all inventory purchases and their costs. The inventory and COGS accounts are updated at the end of a set period, which could be once a month, once a quarter or once a year. COGS is a key accounting metric, which when subtracted from revenue, shows a company's gross margin. Under the periodic inventory system, COGS is calculated as follows:
Beginning Balance of Inventory + Cost of Inventory Purchases - Cost of Ending Inventory
Periodic vs. perpetual inventory systems
Periodic systems do not track inventory daily, unlike perpetual inventory systems, which record store balances of inventory after every transaction through point-of-sale (PoS) inventory systems and do not rely solely on quarterly or annual data to calculate COGS. Generally accepted accounting principles permit companies to use either periodic or perpetual systems to monitor inventory.
Managers at companies that are small or resource-constrained may have to weigh the costs and benefits of using perpetual versus periodic inventory systems. To cover all bases, some experts recommend regularly performing physical audits under both perpetual and periodic inventory systems.