Periodic inventory is an inventory system wherein updates are made on an occasional basis. It differs from perpetual inventory, in which updates are made often.
Periodic inventory systems do not focus on maintaining current records of either the cost of goods sold or inventory, which are assessed only on occasion, such as year-end.
The physical count decides the quantity of inventory appearing in the balance sheet. Thereafter, cost of goods sold for the year then is determined.
Perpetual inventory systems are often susceptible to inaccuracy due to understatements (missing inventory) or overstatements (phantom inventory) or errors that can occur because of breakage, scanning errors, theft or untracked inventory movements, leading to systematic errors in replenishment.
The Perpetual Inventory formula is:
Beginning Inventory (from a physical count) + Receipts – Shipments = Ending Inventory.
Some accountants will make an adjustment journal entry to add or subtract stock, but when all receipts (purchases) and shipments (invoices) are entered as transactions, adjustment entries do not need to take place.