Referring to the earlier topic, which covered what is inventory, the essential question is how to correctly manage inventory, track and calculate cost of inventory sold and cost of inventory, which remains at the end of the accounting period for further sales.
For this purpose two inventory management systems can be used:
- perpetual inventory system
- periodic inventory system
What is Periodic Inventory System?
Under Periodic Inventory System, the company does not track each and every inventory transaction.
- Quantity of inventory on hand and quantity of inventory sold is not known at every period of time, but is rather estimated periodically
- At the end of the selected period the company needs to calculate quantity of inventory on hand and calculate quantity of inventory sold, taking into account opening inventory and purchases made during the accounting period
It is cheaper to maintain this inventory management system, however it does not provide precise view of the inventory status at the particular time. Also application of periodic inventort system does not allow to control inventory so precisely, as it is possible to do under perpetual inventory system.
Explore further Perpetual Inventory System
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