A periodic inventory system updates the stock figure only when you count. Between counts, purchases are recorded but sales take nothing off stock. At each count, the closing stock gives the cost of goods sold: opening stock plus purchases, minus what is left.
The system is cheap and simple, and it hides every loss inside cost of goods sold. This guide works one month of a Kampala hardware shop through it in Ugandan shillings, then shows how to estimate stock between counts.
How a periodic inventory system works
A periodic system runs in a cycle of four steps, repeated each period.
- Start from a count. Last period's closing count is this period's opening stock.
- Record purchases, not stock. Each delivery goes to a purchases account, and the stock figure doesn't move.
- Record sales as revenue only. A sale records the money. Nothing records the cost of the goods that left.
- Count, then work out what was sold. The closing count, valued at cost, gives cost of goods sold by subtraction.
The period can be a month, a quarter or a year. For a shop, a year is too long: eleven months pass with no stock figure and no profit.
The periodic inventory formula, worked in UGX
Under a periodic system, cost of goods sold is what you had available to sell, less what is left:
Cost of goods sold = opening stock + purchases − closing stock
For example, a hardware shop in Kampala buys cement at UGX 32,000 a bag and sells it at UGX 36,000. It starts March with 120 bags, takes two deliveries of 200 and counts 82 bags on 31 March. The figures are illustrative.
| Line | Bags | UGX |
|---|---|---|
| Opening stock, counted on 28 February | 120 | 3,840,000 |
| Purchases, 4 and 18 March | 400 | 12,800,000 |
| Goods available to sell | 520 | 16,640,000 |
| Closing stock, counted on 31 March | 82 | 2,624,000 |
| Cost of goods sold | 438 | 14,016,000 |
Sales were UGX 15,480,000, so the month's gross profit is UGX 1,464,000, a margin of 9.5%. What belongs in the cost itself, such as transport and duties, is covered in cost of goods sold.
Every figure in the table comes from a count or an invoice. None comes from the sales: the system never asked how many bags were sold.
The journal entries in a periodic system
A periodic system posts purchases to a purchases account during the period. Stock and cost of goods sold are settled in one set of entries at the end. In the words of OpenStax's Principles of Accounting, "Purchases is used instead of Merchandise Inventory".
| Event | Debit | Credit | Amount |
|---|---|---|---|
| Each delivery of 200 bags, on credit | Purchases | Accounts payable | 6,400,000 |
| Sales of the month | Cash or accounts receivable | Sales revenue | 15,480,000 |
| Torn bags, 22 March | No entry | No entry | Nothing |
| Month end: take out the opening stock | Cost of goods sold | Inventory | 3,840,000 |
| Month end: close the purchases | Cost of goods sold | Purchases | 12,800,000 |
| Month end: put in the counted stock | Inventory | Cost of goods sold | 2,624,000 |
Cost of goods sold ends at 3,840,000 + 12,800,000 − 2,624,000 = UGX 14,016,000, and inventory at the count's UGX 2,624,000. Goods sent back to a supplier would go to purchase returns, an account that reduces purchases.
What a periodic system hides
A periodic system hides every loss inside cost of goods sold. Whatever is not on the shelf at the count is treated as sold, whether a customer paid for it or not.
In the cement month, the till sold 430 bags. Four tore while being stacked and four more went with no record, so the formula's 438 includes 8 bags nobody bought.
Those 8 bags cost UGX 256,000, nearly 15% of the month's gross profit on cement. The owner sees only a margin of 9.5% where the price list promised 11.1%, and can't tell which week or whose shift.
Two more things stay unknown until the count: how much of each product is left, and the month's profit. A shop that counts each quarter runs on guesses for three months at a time.
How to estimate stock between counts
A periodic shop can estimate its closing stock without counting, using the gross profit method. It needs three figures it already has: opening stock, purchases and sales.
- Goods available. Opening stock plus purchases, at cost: UGX 16,640,000.
- Estimated cost of goods sold. Sales times the share of the price that is cost. Cement costs 32,000 of every 36,000, eight ninths, so 15,480,000 × 8 ÷ 9 = UGX 13,760,000.
- Estimated closing stock. Goods available less that cost: 16,640,000 − 13,760,000 = UGX 2,880,000, or 90 bags.
The count found UGX 2,624,000. The UGX 256,000 between the estimate and the count is the loss the formula hid, found without a stock card.
Take the margin from your price list, not from last year's accounts. AccountingTools notes that the estimate comes out too high when the margin leaves losses out. Here that is the point: the excess is the loss.
Discounts and price changes bend the result, so use it on lines with one steady margin. It is only an estimate between counts. AccountingTools calls it "not an acceptable method" for the year-end figure, which must come from a count.
Who still uses a periodic inventory system?
Periodic counting still fits stock that is used rather than sold by the unit, and one owner selling a few slow lines. Everywhere else, it costs more in hidden losses than it saves in recording.
- Kitchens and bakeries. Ingredients leave by the spoon and the scoop. For example, a bakery in Egypt that starts the week with 20 sacks of flour, receives 30 and counts 18 has used 32 sacks.
- Supplies. Cups, bags and cleaning goods are counted weekly the same way, as how to track consumables shows.
- Goods sold by measure. A trader selling rice by the tin from a sack can't record each scoop as units.
- One owner, a few slow lines. A furniture showroom whose owner sells every piece gains little from recording each sale.
Many guides name convenience stores and gift shops as natural fits. A convenience store sells hundreds of lines all day through a till, often with staff. That is exactly where a periodic count hides the most.
Once someone else sells or receives your stock, a perpetual system pays for itself in the losses it shows. The two are compared side by side in perpetual vs periodic inventory.
Periodic counts in ArmPOS
ArmPOS keeps a perpetual record of quantities, so the periodic part you keep is the count. It checks the record rather than replacing it.
- Print a counting sheet. Products › Count Stock makes one for a warehouse, or for one category, listing what ArmPOS holds (Count and adjust stock).
- Count and note the differences. Write your count beside each line.
- Correct the record. Adjustment › Create Adjustment adds or removes each difference, with a note such as "March count".
- For ingredients, take off what was used. ArmPOS has no production module and uses up no materials by itself, so count them weekly and remove the usage with a Subtraction adjustment.
- Read the value. Reports › Inventory Valuation multiplies each product's stock on hand by its cost (Stock reports).
On plans with Accounting, the ledger takes its cost of sales once a month, like a periodic system. ArmPOS posts each purchase to 1200-INV by itself, but no cost of goods sold, damage or write-down entry.
The month-end entry brings 1200-INV to Inventory Valuation at cost, and inventory accounting shows it step by step. Because sales, damages and adjustments are each recorded, the gap splits into cost of goods sold and losses instead of hiding them together.
Frequently asked questions
What is an example of a periodic inventory system?
A shop that counts its stock at each month end and works out cost of goods sold from the count. The cement shop above is one: 120 + 400 − 82 = 438 bags used up in March.
How do you calculate cost of goods sold under a periodic system?
Add purchases to the opening stock and subtract the closing count, all at cost. Goods returned to suppliers come off purchases first.
How often should you count under a periodic system?
At least monthly for a shop, since the count is your only stock figure and your only profit. Count ingredients and supplies weekly, and everything at the year-end inventory count.
Is the periodic inventory system allowed under IFRS?
Yes. Neither IFRS nor US GAAP requires one recording system, as OpenStax notes. The valuation rules, such as the ban on LIFO under IFRS, apply under either.
Why is cost of goods sold higher under a periodic system?
Because it includes the losses. Broken, expired and stolen goods are missing at the count, so the formula counts them as sold.
Work out last month's figure for your best-selling line: the opening count, the purchases and today's count, then the estimate from your price list. If they differ, create a free ArmPOS account and keep that line's record perpetual, so next month you can see where the gap went.
