What it means
Unlike modern digital setups that update automatically every time an item scans through a till, the periodic approach relies on a physical stocktake at set dates. During the accounting period, businesses record all purchases in a temporary purchase account.
When they want to know their profit or inventory value, staff physically count everything left on the shelves. This method is popular with smaller businesses because it is cheap and simple to set up.
You do not need expensive barcode scanners, specialised software, or constant database updates. You simply look at what you started with, add what you bought, and subtract what is physically left at the end to calculate your cost of goods sold.
The main drawback is the lack of real-time visibility. If a customer asks if an item is in stock mid-month, staff might have to check the shop floor rather than a computer screen.
Furthermore, because cost of goods sold is calculated in bulk at the end of the period, businesses cannot easily track losses from theft, damage, or administrative errors until the physical count reveals a discrepancy. Imagine tracking your household groceries by looking in the pantry once a month rather than keeping a daily receipt log.
You start with ten tins of soup, buy twenty more during the month, and find five left at the end, meaning you used twenty-five.
In practice
Real-world examples
Example 1
A local bookstore counts its remaining novels on the last day of every month. By comparing the count with opening stock and purchases, the owner works out how many books were sold and calculates the monthly profit. Nothing is recorded against individual titles during the month, so the answer only arrives once the count is complete.
Example 2
A small hardware shop reviews its stock of nails and hammers once a quarter. This periodic count helps the manager prepare quarterly financial accounts without needing complex tracking software. The trade-off is that a shortage of a popular item is usually spotted by a customer asking for it, not by a report.
Example 3
A boutique clothing maker takes stock of fabric rolls twice a year. This schedule aligns with its tax reporting deadlines, keeping administration simple for the sole trader. The maker accepts that any fabric wasted or mislaid between counts will simply be absorbed into the cost of goods sold.
Think of it
Imagine tracking your household groceries by looking in the pantry once a month rather than keeping a daily receipt log. You start with ten tins of soup, buy twenty more during the month, and find five left at the end, meaning you used twenty-five.
Formula
Calculation
Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - Ending Inventory
Example:
- Beginning Inventory: $1,000
- Purchases: $5,000
- Ending Inventory (counted): $1,500
COGS = 1,000 + 5,000 - 1,500 = $4,500
The first two lines tell you the total value of goods available for sale ($1,000 + $5,000 = $6,000). Whatever was not found on the shelves at the count ($1,500) is assumed to have been sold, so $4,500 becomes the cost of goods sold. If sales for the period were $9,000, gross profit would be $9,000 - $4,500 = $4,500.Case study
Seen in the real world
This is a fictional, illustrative scenario. Oak Furniture Emporium uses a periodic inventory system to manage its wooden tables and chairs. At the start of the financial year, the owner records an opening stock value of $20,000. Throughout the year, the business purchases an additional $50,000 worth of inventory.
Because sales are not logged individually against stock items, the business has no exact digital record of inventory levels during the year. On the final day of the year, staff spend the evening physically counting every item in the warehouse. They determine that the ending inventory has a total cost value of $15,000. To calculate the cost of goods sold for the annual accounts, the accountant applies the standard formula: $20,000 beginning inventory, plus $50,000 purchases, minus $15,000 ending inventory, resulting in a cost of goods sold of $55,000.
This figure is then matched against total sales revenue to find the gross profit. While this approach saved the business money on software setup costs, the owner notes that any stock theft or breakage during the year is hidden inside the final cost of goods sold figure. If, for example, $2,000 of tables were damaged in storage and thrown away, the accounts would still show them as part of the $55,000. After two years of this, the owner began cycle counting the most valuable lines every quarter so that losses surfaced sooner.
Watch out
Common mistakes
- Assuming inventory levels shown in the accounts are up-to-date during the middle of an accounting period.
- Forgetting to include carriage costs paid on incoming stock purchases within the total purchase calculation.
- Failing to conduct an accurate physical count at the end of the period, which distorts both profit and tax figures.
Questions
People also ask
Why would a business choose a periodic system over a perpetual one?
It is much cheaper, simpler to run, and requires minimal administrative effort, making it ideal for small shops with low transaction volumes.
How do you know what items were stolen or lost?
Under this system, you generally cannot track shrinkage easily because losses are simply lumped into the final cost of goods sold calculation.
Is this system compliant with standard accounting rules?
Yes, provided that a thorough and accurate physical inventory count is conducted at the end of every accounting period.