Stock Valuation Method Used in Infusion Financial Reports

Infusion uses the Periodic rather than the Perpetual method of stock valuation.

What Is the Periodic Inventory System?

The periodic inventory system, also called the noncontinuous system, is a method companies use to account for their products. Based on a specified accounting period, periodic inventory does not keep a day-by-day tally of goods, purchases, sales and their associated costs.

This system works by recording all purchases into a purchase account. The company then makes a count of the physical inventory and the accountant shifts any balance in the purchases into the inventory account OR the system re-values the inventory based on the running balance of the stock holding.

Next, the users or accountant adjusts the closing inventory and balance sheet inventory accounts to match the cost of the ending inventory. A hallmark of a periodic system is regular physical counts of goods. Whether the company performs it weekly, monthly, quarterly or annually, this inventory kicks off the records reconciliation.

In a periodic system, companies calculate Cost of Goods Sold (COGS) directly after a physical inventory or re-valuation, as they do not keep it on a rolling basis, nor do they update it continuously after each transaction. They debit all purchases to a purchase account. Once the period is complete, the company adds the purchase account totals to the inventory’s beginning balance. Then, the company can also compute the cost of goods available for sale for the new period.

Periodic inventory has its own formula which is used to calculate the Cost of Goods Sold:

Cost Of Goods Sold = Beginning inventory + Receipts - Ending Inventory

What Is Perpetual Inventory?

Perpetual inventory is a continuous accounting practice that records inventory changes in real-time, without the need for physical inventory, so the book inventory accurately shows the real stock.

Perpetual inventory systems use the following formula to calculate the ending inventory:

Ending Inventory = Beginning inventory + Receipts - Shipments

Differences between the periodic and perpetual systems:

Updating Your Accounts:

In a perpetual system, updates to the general ledger and inventory ledger are continuous with every transaction. In a periodic system, updates to the general ledger only occur when there is a physical count or a revaluation of the inventory i.e. not based upon every transaction.

Calculating Cost of Goods Sold (COGS):

Under a perpetual system, the software system maintains a running tally of transactions, so it is always able to provide COGS. A periodic inventory system calculates COGS after revaluing the inventory, typically at the end of an accounting period such as a month or year-end. It is not possible to calculate a precise COGS before the end of the accounting period.

Recording Purchases:

In a perpetual system, you record purchases in the raw materials inventory account or the merchandise account. In a periodic system, you log purchases into the purchases expense account.