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Chapter 5 - The Periodic Inventory System EXPLAINED! - YouTube
Channel: Else Grech Accounting
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I else here and in this video you'll be
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learning about to inventory tracking
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systems periodic and perpetual let's
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first remind ourselves about inventory
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inventory is a finished good that
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merchandisers buy today so they can
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generate revenue by reselling it to
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their customers tomorrow inventory is
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most often a current asset because it's
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sold in the upcoming year or operating
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cycle whichever is longer but that
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really depends on the industry the
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merchandiser happens to be in
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considering their business model what
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would be a key success factor for
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merchandisers selling products is a very
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competitive business customers want not
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only the best price but they want it now
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if it's not on your shelf they'll go to
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your competitor recording and tracking
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inventory is therefore a key success
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factor for merchandising businesses
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there are two inventory systems that can
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be used to record and track inventory
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the periodic inventory system and the
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perpetual inventory system let's start
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with the periodic system periodic means
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happening occasionally at set intervals
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to demonstrate the periodic system let's
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use an example say you're a retailer and
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you purchased 25 units of inventory on
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June 1st and then another 52 units on
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June 16th using the periodic inventory
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system you record both purchases as
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increases to a purchases account the
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purchases account is where you track
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your inventory now you know how many
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units you purchased a total of 77 say
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you sell inventory throughout the whole
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month
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what do you record when you sell the
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inventory you record the sales revenue
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and the cash increased or accounts
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receivable increasing but the purchases
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account will still show 77 units
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inventory sold is not removed from the
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purchases account what problems does
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this create well if you want to know how
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many units are left in inventory at June
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30th you will have no information about
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that if you want to know if you should
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purchase more inventory at the end of
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June you can't find that out by using
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your inventory tracking system either
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you have to walk around your location
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and count what you have in order to
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figure out what
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need gross profit margin is selling
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price less the cost of your inventory
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since you don't have information about
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the cost of the unit sold you can't
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calculate this either and you therefore
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don't know if you're profitable or not
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so how do you find out all this
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information periodically like on June
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30th
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you have to count your inventory in this
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case you discover that you have 26 units
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remaining you bought 77 units remember
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25 plus 52 and you only have 26
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remaining so 51 are gone the question
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then becomes did you sell all of those
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51 units over some stolen actually when
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you use the periodic inventory system
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you assume that all the inventory gone
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has been sold
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that's because using this system you
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have no way of knowing whether items
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have been stolen since you never track
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decreases in inventory when you sell it
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let's summarize the periodic system
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tracking of inventory using the periodic
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inventory system you record all of your
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inventory purchases but you only track
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sales through the sales revenue account
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never through the purchases account
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instead you count your inventory
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periodically at the end of the period to
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discover how much is left when you take
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your purchases and deduct your remaining
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inventory you determine how much is gone
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because you don't have any way of
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checking you have to assume that what is
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gone has been sold using that
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information you can now calculate the
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gross profit margin which is sales less
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the cost of inventory but this is only
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done periodically at set times during
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the year why would anyone choose to use
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a periodic inventory system to track
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their inventory when you can see that
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there are negatives because it's cheaper
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you spend less time and less labor on
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continually keeping up the inventory
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records it is also cheaper because you
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don't need a complex computer system to
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record all your inventory purchases and
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sales you can get by using a simple cash
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register it is also a much simpler
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system to maintain so there are both
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advantages and disadvantages to a
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periodic inventory system in the next
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video we'll explore the perpetual
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inventory system
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