Definition: A periodic inventory system records inventory purchases at specific time intervals and doesn’t keep a continuous, real time record of inventory in stock or goods sold to customers. In other words, it’s exactly what it sounds like. A period inventory system records inventory purchases and sales periodically throughout an accounting period. Purchase and sale records are usually saved until a specific time interval and input in batches.
For instance, a retailer might record sales and purchases every other Saturday. For two weeks the invoices will pile up and then be entered into the system or updated every two weeks. This is usually done for convenience. It’s difficult to maintain and accurate record of inventory every single day in real time if someone is doing it manually. This can be a very time consuming task. That’s why they only do it periodically.
What Does Periodic Inventory System Mean?
Periodic Inventory Disadvantages
The main problem with a periodic system is that it doesn’t provide real time data for managers. No one knows how much inventory is on hand at any point in time because they are always working off of old data from the last update. The only time a period inventory system is truly up to date is at the end of an accounting period. Although a period system saves input time, it can actually cost the company money.
That is why almost all modern computerized accounting systems use a perpetual inventory system that tracks and updates inventory purchases, sales, and cost of goods sold in real time. As soon as a piece of inventory is sold, it is removed from the inventory account in the general ledger and other reports. This way managers can have up to date information to base their buying and selling decisions on.