“Periodic Inventory Method” is a system in which inventory is counted periodically, such as at the end of the month or at the end of the year. In this method inventory is not updated daily.
What is the periodic inventory method?
In this method the inventory is calculated periodically. Daily sales or purchase data is not added to inventory. At the end of the month, quarter, or year a business determines the correct amount of inventory by counting the stock items.
Process
In the periodic inventory system, business organizations count the inventory at specified intervals and prepare the related reports based on that calculation. There are three main steps in this method:
- Stock count: Stock count is done after certain time. All products are measured directly by hand to calculate this. This is usually done at the end of the business year or on a quarterly basis.
- Sales Account: When inventory is calculated, the goods sold are deducted from the previous inventory and the amount of remaining inventory is determined.
- Re-stocking: When stocks run low or products run out, they have to be restocked. Purchase orders are placed as per stock requirements.
Benefits
- Simple method: It is easy to operate and technology uses not much seen.
- Low Cost: It uses less technology, so costs reduced.
- Suitable for Small Businesses: Ideal for those who do not feel the need for constant inventory control.
Challenges
- Lack of real time information: Accurate stock information is not available, so it is difficult to take immediate decisions.
- Risk of error: Errors may occur while calculating manually.
- Overstocking or Out of Stock: Lack of accurate information can lead to overstocking or overstocking problems.
Periodic inventory method is simple and cost-effective to operate, but rarely used in large organizations due to the lack of real-time inventory information. This can be effective for small businesses.
More Resources
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