The Periodic Inventory System is a common inventory management approach that tracks inventory levels by recording updates periodically, such as at the end of an accounting period. Unlike the perpetual inventory system where updates are made continuously, this approach updates inventory counts at a fixed interval, often monthly or yearly.
This system is often simpler to implement and cost-effective for businesses with smaller or less dynamic inventories, as it does not require ongoing tracking or specialized technology. However, it does require a complete physical count of inventory during the update interval to determine the closing inventory balance and any cost of goods sold.
For example, a small retail shop might use the Periodic Inventory System by conducting a physical inventory count at the end of each month to determine how many items were sold, and how many remain in stock. The revenue and expense reports are then updated accordingly.
The periodic nature of this system makes it useful for generating periodic financial statements, especially for businesses where stock changes infrequently or when detailed tracking is not economically feasible. However, it may lack the immediate accuracy required in dynamic or large inventory settings. Organizations looking to optimize their inventory practices often consider whether periodic or perpetual systems better suit their operational needs and resources.