Periodic inventory system
In one sentenceA system in which the inventory balance is not updated with each transaction but is determined by a physical count at the end of the period, from which the cost of sales is derived.
Simply put
In the periodic system you record purchases in a purchases account, and you only know the cost of what you sold when you count at the end of the period.
It is a simple method that suits small shops, but it does not reveal shortages or theft, because any shortfall automatically becomes part of the cost of sales.
Worked example
A grocery started the year with inventory of 50,000 SAR, bought goods worth 200,000 SAR during it, and the year-end count found inventory worth 70,000 SAR.
Opening inventory50,000 SAR
+ Purchases200,000 SAR
− Closing inventory (by count)70,000 SAR
Cost of goods sold = 50,000 + 200,000 − 70,000180,000 SAR
Formula: Opening inventory + purchases − closing inventory
Don't confuse it with
Perpetual inventory systemIn the perpetual system you know the balance and the cost of sales after every transaction, and the count only serves as confirmation.