Inventory Systems: Periodic vs. Perpetual Inventory Tracking

Two Ways to Track Inventory

Businesses generally track inventory using either a periodic system or a perpetual system. The difference is timing: periodic delays the calculation of inventory and cost of goods sold (COGS) until the end of the period, while perpetual updates inventory and COGS continuously as purchases and sales happen.

Periodic Inventory System (updates at period-end)

Under a periodic system, the company records purchases during the period in a temporary account (commonly Purchases). The Inventory account is not updated for each purchase or sale. When sales occur, the company records revenue, but does not record COGS at that time. Instead, COGS is computed at period-end after a physical count determines ending inventory.

What gets recorded during the period

• Purchases of inventory go to Purchases (not Inventory).
• Sales record revenue (and cash/receivable), but no COGS entry is made at the time of sale.

How COGS is computed at period-end

At the end of the period, the business performs a physical count to determine ending inventory. Then COGS is computed using:

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COGS = Beginning Inventory + Net Purchases − Ending Inventory

Because COGS is computed after the count, the periodic system relies heavily on accurate period-end counting and cut-off (making sure purchases and sales are recorded in the correct period).

Perpetual Inventory System (updates continuously)

Under a perpetual system, the company records inventory in the Inventory account whenever it buys goods, and it records COGS every time it sells goods. This means the accounting records maintain a running balance of inventory on hand (subject to shrinkage, errors, or timing differences that may be corrected at period-end).

What gets recorded during the period

• Purchases of inventory increase Inventory.
• Each sale triggers two entries: one for revenue and one to move cost from Inventory to COGS.

Period-end still matters

Even in a perpetual system, many businesses still perform a physical count periodically. If the counted inventory differs from the book balance, an adjustment is recorded to bring Inventory to the counted amount (often with the offset to COGS or a shrinkage/variance account, depending on company policy).

How Purchases and Sales Are Recorded (Step-by-Step)

Periodic: example entries

Assume the company buys goods for $1,000 on account, then sells goods for $1,500 cash. (The cost of the goods sold is not recorded until period-end.)

1) At purchase (during the period)

Dr Purchases                 1,000
    Cr Accounts Payable              1,000

2) At sale (during the period)

Dr Cash                      1,500
    Cr Sales Revenue                 1,500

3) At period-end (after physical count)

COGS is computed using the formula. The exact journal entries vary by textbook/company approach, but the key idea is: ending inventory is established from the physical count and COGS is recognized based on the period’s purchases and the change in inventory.

Perpetual: example entries

Assume the company buys goods for $1,000 on account, then sells goods for $1,500 cash, and the cost of the goods sold is $900.

1) At purchase

Dr Inventory                 1,000
    Cr Accounts Payable              1,000

2) At sale (two-part entry)

Dr Cash                      1,500
    Cr Sales Revenue                 1,500

Dr Cost of Goods Sold          900
    Cr Inventory                      900

3) At period-end (if physical count differs)

If the physical count shows inventory is $20 less than the book balance, one common adjustment is:

Dr Cost of Goods Sold           20
    Cr Inventory                       20

Side-by-Side Workflow Comparison

Practice: Identify the System by the Accounts Affected

Read each mini-case and identify whether the company is using a periodic or perpetual inventory system. Focus on which accounts are used at purchase and at sale.

Scenario A

A company records the following entries:

• When goods are purchased: Dr Purchases, Cr Accounts Payable
• When goods are sold: Dr Cash, Cr Sales Revenue
• No entry is made to Cost of Goods Sold at the time of sale

Question: Which system is being used?

Scenario B

A company records the following entries:

• When goods are purchased: Dr Inventory, Cr Accounts Payable
• When goods are sold: (1) Dr Accounts Receivable, Cr Sales Revenue and (2) Dr Cost of Goods Sold, Cr Inventory

Question: Which system is being used?

Scenario C

A company makes this entry at the end of the month after a physical count shows less inventory on hand than the accounting records:

Dr Cost of Goods Sold
    Cr Inventory

During the month, each sale also included an entry to Cost of Goods Sold.

Question: Which system is being used, and what does the period-end entry suggest happened?