![]() ![]() With hundreds, or even thousands, of items to track and count, the idea of performing a physical inventory count every week, let alone daily or on demand, is improbable at the least. The interval varies by system and company, but the end of the accounting period could be month-to-month, quarterly, or even once a year.ĭepending on the size of the business, using a periodic inventory system can be a hard road to travel. Purchases are recorded in the purchases account, and both the inventory account and the cost of goods sold account are updated at the end of a specific period. In this systems, inventory records and COGS rely on a physical inventory count. However, such an investment yields tangible benefits almost immediately in the form of process improvements and data transparency. Researching and implementing inventory management as part of a large-scale business process improvement initiative (e.g., digitizing your purchasing and accounts payable functions through a transition to a centralized, cloud-based procurement software solution) have a certain price tag attached. ![]() It also allows you to integrate your inventory management with the rest of your business processes automation strategy, providing efficiency improvements in procurement, accounting, and beyond. Real-time inventory counts, supported by the use of digital tools (e.g., inventory management software), make it easier to calculate COGS and update the cost of goods sold account. ![]() As a result, the inventory account balance is always up to date, barring unrecorded changes due to theft or damaged goods. Purchases are automatically recorded, either in the raw materials inventory account or the merchandise account, depending on the type of items purchased. Every time goods are received or sold, the system automatically records the change in the inventory account. The more modern of the two inventory management options, perpetual systems provide real-time updates on inventory levels. (Beginning Inventory Balance + Cost of Inventory Purchases) – Ending Inventory Cost = COGS Perpetual Inventory Systems Both perpetual inventory systems and periodic inventory systems allow you to monitor inventory and calculate COGS.įor both systems, COGS (which essentially tracks a company’s gross margin) is calculated as follows. Tracking inventory effectively requires awareness of what you have on hand (inventory balance) and the cost of goods sold (COGS). Perpetual vs Periodic Inventory Systems: The Basics The two most common ways to manage inventory- perpetual inventory systems and periodic inventory systems-each have their own pros and cons, so it’s important to understand how they differ when deciding which is right for your business. Every company with goods on hand needs to track them accurately and completely. From mega corporations to the smallest of small businesses, knowing what you have, what you need, and how well you’re balancing your expenses against your sales is part of running a successful business. ![]()
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