How do you compare a periodic inventory system with a perpetual inventory system?

2 How does a periodic inventory system work?

A periodic inventory system works by beginning the accounting period with the value of the goods that were carried over from the previous period in the inventory account. During the accounting period, the purchases account records the cost of the goods that were bought from suppliers, and the sales account records the revenue from the goods that were sold to customers. At the end of the accounting period, the inventory account is updated by subtracting the cost of goods sold from the sum of the beginning inventory and the purchases. The cost of goods sold is calculated by using the formula: Beginning inventory + Purchases - Ending inventory. The ending inventory is determined by conducting a physical count of the goods on hand and multiplying the quantity by the unit cost. The difference between the sales and the cost of goods sold is the gross profit, which is reported on the income statement.

4 How to compare a periodic inventory system with a perpetual inventory system?

When comparing a periodic inventory system with a perpetual inventory system, you should consider the size and nature of your business, the availability and affordability of technology, and the accuracy and timeliness of information. If you have a small or simple business with limited or outdated technology, periodic inventory system may be sufficient and cost-effective. On the other hand, if you have a large or complex business with access to modern and reliable technology, a perpetual inventory system may be more suitable and beneficial. Additionally, if you need to have accurate and timely information about your inventory levels and the cost of goods sold, a perpetual inventory system may be more useful. However, if you can afford to have less precise and frequent information about your inventory, a periodic inventory system may be more convenient.

5 How to choose the best inventory system for your business?

Choosing the best inventory system for your business depends on your specific needs, goals, and resources. You should weigh the advantages and disadvantages of each method, and evaluate how they fit with your business model, operations, and accounting practices. You should also consider the legal and tax implications of each method, and consult with your accountant or auditor if you have any doubts or questions. Ultimately, you should choose the inventory system that helps you manage your inventory effectively and efficiently, and reflects the true financial performance and position of your business.