How Simplicity Makes the Periodic Inventory Method the Right Choice

Companies tracking inventory will use either the perpetual or periodic inventory methods to account for the cost of goods sold (COGS).

The two methods work to achieve the same connective purpose. They determine when and how a company pushes COGS from its inventory journals to its financial accounting system.

Historically, the periodic method was recommended only for small businesses carrying minimal inventory. Experts would recommend a company to do a physical stocktake to finalize inventory journals before recording information to accounts.

The old manual periodic method derived COGS from recorded sales and inventory values. The math looked like this for any given period:

($ Starting Inventory + $ Purchased Inventory) – $ of Ending Inventory = COGS

In the accounts, the COGS was subtracted from sales to give the gross profits for that period.

Isn’t the Perpetual Method Better?

The perpetual method allows a business to see the value of stock on hand at any given time, separating expenses from assets. The periodic inventory method focuses on accounting purchased stock as an expense for a particular period.

Perpetual gives a business finer and ongoing detail of its stock on hand value, but it is more technically demanding. In order to make the perpetual inventory method work, a company must keep its inventory information (ie, journals) balanced with its stock on hand account.

This can get tricky without dedicating staff (versed in inventory accounting principles) to ensure that transactions are correctly, regularly and completely pushed to their accounting software. Transactions like stock purchases and adjustments, for example, must be continuously exported to Xero or Quickbooks.

Periodic Inventory Method is Just Easier

The periodic method is a viable way to keep on top of inventory accounting, especially with the right inventory management solution.

Cin7 is the only cloud-based inventory management solution that accommodates both periodic and perpetual inventory methods. The default setting is perpetual management, but for companies in particular countries (Australia) or companies that are leaner, periodic is recommended.

Regardless of method, Cin7’s powerful inventory management allows users to gain accurate stock on hand valuations and gross profit reports at a glance.