Periodic vs. perpetual inventory systems
Periodic and perpetual inventory systems are the two methods of tracking inventory. A periodic system updates inventory and cost of goods sold only at period end via a physical count, while a perpetual system updates records continuously with every purchase and sale.
Every company that sells goods must track how much inventory it holds and how much cost to expense as goods are sold. Accounting offers two systems for doing this: periodic and perpetual. The difference is timing — when the inventory records are updated.
Under a periodic system, the inventory account is left untouched during the period. Purchases are accumulated in a separate purchases account, and only at period end does the company take a physical count. Cost of goods sold is then computed with the formula: beginning inventory + net purchases − ending inventory = COGS. The system is simple and cheap, but management has no running record of inventory levels between counts.
Under a perpetual system, every purchase and every sale updates the inventory account in real time. Each sale triggers two entries: one recording revenue, and one moving cost from inventory to COGS. Modern point-of-sale and barcode systems make this practical for even high-volume retailers. Physical counts are still taken, but their role shifts to verifying the records and measuring shrinkage (theft, damage, and error), since the books already show what inventory should be on hand.
The choice interacts with cost flow assumptions: FIFO gives the same result under either system, but LIFO and weighted average can produce different numbers depending on whether costs are assigned at each sale or once at period end. The CMA Part 1 exam tests both systems — expect to prepare journal entries under each, compute COGS with the periodic formula, and apply cost flow assumptions within each system.
Key takeaways
- A periodic system updates inventory only at period end using a physical count.
- Periodic COGS is computed as beginning inventory + net purchases − ending inventory.
- A perpetual system updates inventory and COGS continuously with every purchase and sale.
- Under a perpetual system, physical counts verify records and reveal shrinkage rather than establish balances.
- CMA Part 1 tests journal entries and COGS computations under both systems.