A Periodic Inventory System
A periodic inventory system is an accounting method in which the cost of goods sold is determined periodically, usually annually and typically not more frequently than quarterly.
The disadvantage is the systems inability to continuously update inventory levelsThe periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. For them, a physical inventory count is easy to complete, and they can estimate cost of goods sold figures for interim periods. However, there are several problems with the system:Minimal information. It does not yield any information about the cost of goods sold or ending inventory balances during interim periods when there has been no physical inventory count. Estimation errors. You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods whenever you eventually complete a physical inventory count. Large adjustments. There is no way to adjust for obsolete inventory or scrap losses during interim periods, so there tends to be a significant (and expensive) adjustment for these issues when a physical inventory count is eventually completed. Not scalable. It is not an adequate system for larger companies with large inventory investments, given its high level of inaccuracy at any given point in time (other than the day when the system is updated with the latest physical inventory count).http://www.accountingtools.com/periodic-inventory-systemThe most significant difficulty with a periodic inventory system is determining the value of inventory. The inventory accounting method most often used with a periodic inventory system is Last In/First Out (LIFO). Under LIFO it is assumed that the most recent purchases are the ones that are first used. The value of the ending inventory is based on the oldest costs for the materials still in inventory.Read more at:
The disadvantage is the systems inability to continuously update inventory levelsThe periodic inventory system is most useful for smaller businesses that maintain minimal amounts of inventory. For them, a physical inventory count is easy to complete, and they can estimate cost of goods sold figures for interim periods. However, there are several problems with the system:Minimal information. It does not yield any information about the cost of goods sold or ending inventory balances during interim periods when there has been no physical inventory count. Estimation errors. You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods whenever you eventually complete a physical inventory count. Large adjustments. There is no way to adjust for obsolete inventory or scrap losses during interim periods, so there tends to be a significant (and expensive) adjustment for these issues when a physical inventory count is eventually completed. Not scalable. It is not an adequate system for larger companies with large inventory investments, given its high level of inaccuracy at any given point in time (other than the day when the system is updated with the latest physical inventory count).http://www.accountingtools.com/periodic-inventory-systemThe most significant difficulty with a periodic inventory system is determining the value of inventory. The inventory accounting method most often used with a periodic inventory system is Last In/First Out (LIFO). Under LIFO it is assumed that the most recent purchases are the ones that are first used. The value of the ending inventory is based on the oldest costs for the materials still in inventory.Read more at: