Periodic vs Perpetual Inventory System

Periodic inventory is the system in which the company does not track individual item movement but only performs physical counts at the month-end. The business only knows the inventory quantity at the beginning and month-end, but they will not know the exact amount in the middle of the month. Moreover, the company is not able to track the daily inventory movement. They only rely on the physical count at a specific point in time.

Under the periodic system, new inventory purchases will be recorded into the inventory account after receiving. The cost of goods sold will be calculated by deducting the ending balance.

Beginning balance + New Purchase = Total inventory cost

Total inventory cost – ending inventory balance = Cost of goods sold

Or

Cost of goods sold = Beginning balance + New Purchase – Ending inventory balance

It makes sense when we look at the formula, the beginning balance plus new purchase less ending must result as the sold item. However, if the items are not sold, but they are broken or stolen. This system will account for those items as sold. This formula only uses to make assumptions and calculate the quantity of inventory being sold. To calculate the valuation of goods sold, it will be a problem when the cost we spend changes over time. We will use the valuation methods such as FIFO, LIFO, and Weighted average.

Periodic Journal Entries

Purchase inventory from a supplier on credit

  • Dr. Purchase
  • Cr. Accounts Payable

Purchase discount

  • Dr. Accounts Payable
  • Cr. Purchase Discount

Purchase return

  • Dr. Accounts Payable
  • Cr. Purchase Return

Inventory Sale

  • Dr. Accounts Receivable
  • Cr. Sale

Sale Discount

  • Dr. Sale Discounted
  • Cr. Accounts Receivable

Sale Return

  • Dr. Sale Return
  • Cr. Accounts Receivable

Month-end closing entries

  • Dr. Inventory (ending balance)
  • Dr. COGS
  • Cr. Inventory (Beginning balance)
  • Cr. Purchase during the month

Perpetual Inventory System

Perpetual inventory is the system in which company keeps track of each inventory item level since it was purchase and sold to the customer.

This system allows the company to know exactly how much inventory they have at any specific time period. They just log into the system and it will tell the remaining balance. Moreover, the tracking of the cost of goods sold will be more accurate if compare to periodic. The cost of goods will be the total cost of goods being sold during the month, it not the balancing figure between the beginning and ending balance.

Perpetual Journal Entries

Purchase inventory from a supplier on credit

  • Dr. Inventory
  • Cr. Accounts Payable

Purchase discount

  • Dr. Accounts Payable
  • Cr. Inventory

Purchase return

  • Dr. Accounts Payable
  • Cr. Inventory

Inventory Sale

  • Dr. Accounts Receivable
  • Dr. COGS
  • Cr. Inventory
  • Cr. Sale

Sale Discount

  • Dr. Sale Discounted
  • Cr. Accounts Receivable

Sale Return

  • Dr. Sale Return
  • Dr. Inventory
  • Cr. COGS
  • Cr. Accounts Receivable

Month-end closing entries: None

Different between Periodic and Perpetual

Transaction Periodic Perpetual
Inventory account Inventory account only updates at the month-end. It shows the balance which remains at the month-end only. Inventory accounts will be updated continually every time there are purchases and sales.
Cost of Goods Sold The cost of goods sold is only calculated and record at the month-end. It is a balancing figure. COGS will be recorded every time the items sold.
Sale Transactions Every sale made, we record only:  

  • Dr. A/R or Cash
  • Cr. Sale
Every sale made, we record as following:

  • Dr. Accounts Receivable
  • Cr. Sale  
  • Dr. COGS
  • Cr. Inventory
Closing Entries At the month-end, we need to calculate the cost of goods sold by using the above formula. And make the journal as below:

  • Dr. COGS
  • Cr. Inventory
Does not require closing entries regarding inventory and cost of goods sold.