A periodic inventory system is a way of tracking inventory by counting stock at specific time intervals, monthly, quarterly, or yearly. Instead of recording inventory changes after each sale or purchase, businesses update inventory records only at the end of the period.

This system is often used by small and medium-sized businesses that don’t require real-time inventory updates. It’s simple to manage and doesn’t need complex software or tools.

If your business handles fewer transactions and can operate without constant inventory checks, the periodic system could be a cost-effective option.

What Is a Periodic Inventory System?

A periodic inventory system is a method where a business updates its inventory records at fixed intervals, such as monthly, quarterly, or yearly. During these periods, no ongoing tracking is done. Instead, a physical count is used to determine the amount of stock on hand.

This system helps calculate the cost of goods sold (COGS) using the formula:
COGS = Opening Inventory + Purchases – Closing Inventory

It’s mostly used by small businesses, retail shops, or companies with low inventory movement. Since it doesn’t rely on real-time updates, it’s easier to manage and doesn’t require complex systems.

 How the Periodic Inventory System Works

In a periodic inventory system, inventory is not tracked daily. Instead, businesses perform a physical count of their stock at the end of a set period, usually monthly, quarterly, or annually.

During the period, purchases are recorded in a separate purchases account. Sales are also tracked, but the inventory account is not updated until the physical count is done.

At the end of the period, the business uses this formula to calculate the cost of goods sold (COGS):

COGS = Opening Inventory + Purchases – Closing Inventory

This method does not show the exact inventory level at any given time. It only updates once the stocktake is completed.

 Key Characteristics of a Periodic Inventory System

• Updates at set intervals: Inventory records are updated only after a physical count is done, usually at the end of a month, quarter, or year.
  
• No real-time tracking: Inventory changes from sales or purchases are not recorded immediately. The stock level remains unchanged until the count.
  
• Relies on physical counts: A manual stocktake is required to determine how much inventory is available.
  
• COGS is calculated after the count: The business calculates the cost of goods sold using the difference between starting inventory, purchases, and the closing stock.
  
• Simpler recording process: Purchases are recorded in a purchases account during the period. Inventory is not updated until the end.

Advantages of a Periodic Inventory System

• Low operating cost
  You don’t need expensive software or barcode scanners. A basic spreadsheet or manual system can manage inventory updates.
  
• Simple to run
  It’s easy to understand and doesn’t require special training. Small teams can handle the process without hiring experts.
  
• Less daily work
  Since inventory isn’t tracked continuously, staff spend less time recording transactions.
  
• Suitable for small businesses
  It works well for businesses with fewer products or low sales volume.
  
• Flexible timing
  You choose when to count inventory monthly, quarterly, or yearly, based on what suits your operations.

 Disadvantages of a Periodic Inventory System

• No real-time inventory updates
  You can’t know your exact stock level until the next physical count is done.
  
• Higher risk of stockouts or overstocking
  Without regular updates, it’s easy to run out of stock or order too much.
  
• Manual counting is time-consuming
  Physical stocktakes can interrupt daily operations and require extra time and effort.
  
• Hard to detect theft or loss early
  Since inventory isn’t tracked regularly, missing items may go unnoticed for weeks or months.
  
• Not ideal for fast-moving products
  Businesses with high sales volume may struggle to keep track of inventory accurately.
  

Best Use Cases for a Periodic Inventory System

• Small retail shops
  Stores with a limited number of products and steady sales can manage stock easily with periodic counts.
  
• Seasonal businesses
  Businesses that sell mostly during holidays or peak seasons can benefit from occasional inventory updates.
  
• Bookstores and gift shops
  These stores often deal with items that don’t move quickly, making them a good fit for periodic tracking.
  
• Local convenience stores
  Small shops with basic inventory needs can save time and money using this system.
  
• Businesses with low inventory turnover
  If your stock doesn’t change often, there’s less need for daily updates.

Periodic vs Perpetual Inventory System

Both systems help track inventory, but they work in different ways. If you want a full comparison, including features, pros, and use cases, check out our detailed guide: Periodic vs Perpetual Inventory System.

Use that article to decide which system fits your business best.

Conclusion

The periodic inventory system offers a straightforward and cost-effective way for small and medium-sized businesses to manage their stock without the need for continuous tracking. By updating inventory records only at set intervals through physical counts it reduces daily workload and simplifies record-keeping. However, it does come with limitations such as a lack of real-time data and a higher risk of stock discrepancies.

If your business has a manageable number of products, low sales volume, or seasonal fluctuations, the periodic system can be a practical choice. For companies needing instant inventory insights or handling fast-moving goods, a perpetual system might be more suitable.

Ultimately, understanding your business’s inventory needs will help you choose the right system to optimize operations and control costs effectively.