Periodic vs perpetual inventory: which fits your shop?

Every shop keeps some kind of stock record. The difference between the two classic approaches is when that record changes: only after a count, or every time goods arrive, sell or move. That choice decides how much daily recording you do and how much you can trust the numbers between counts. For the wider routine around it, see the small-shop stock guide.

What is periodic inventory?

With a periodic approach, you count the stock at set points, such as the end of each month, quarter or year, and the record changes only then. Between counts you keep the purchase invoices but do not adjust a quantity for each product. Sales go through the register as money, not as units leaving the shelf.

The periodic inventory formula

After each count you work out what the goods you sold cost:

• Cost of goods sold = opening inventory + purchases minus closing inventory.

Opening inventory is the value from the last count, purchases are the goods bought since then, and closing inventory is the value from the new count. IRS Publication 334 walks through lines 35 to 42 of Schedule C, which use the same order. They start with beginning inventory, add purchases and other costs, and subtract inventory at the end of the year. This guide is not tax advice; ask your accountant how the rules apply to you.

A periodic inventory example

A fictional gift shop counts at cost each quarter.

The arithmetic is simple, but the result hides a lot. The US$6,300 includes everything that left the shop, whether it was sold, stolen, broken or thrown away. Between counts the owner cannot see which products are running low without walking the shelves.

What is perpetual inventory?

With a perpetual approach, the record changes with every movement. A delivery adds units, a sale removes them, and returns, transfers and write-offs adjust them. The quantity on hand for each product, and for each location if you track them, is meant to be current at any moment.

IRS Publication 538 accepts a perpetual or book inventory kept by sound accounting practices. It still requires a physical inventory at reasonable intervals, with the book amount adjusted to agree with the actual stock.

A perpetual inventory example

A fictional candle shop follows one SKU through a week.

The record told the owner all week that stock was healthy, and the Saturday count found two units unaccounted for. A running record does not remove counting. It tells you what should be there, so a count can show what is wrong.

Accuracy and effort trade-offs

A periodic inventory system costs little day to day and works when the catalog is small, stock is visible from the counter and one person does the buying. A perpetual inventory system suits a shop with many lines, more than one location, or reordering decisions made from the screen. Its weakness is that errors build up quietly. A missed delivery, a sale rung up under the wrong product or an unrecorded breakage leaves the record wrong until someone counts.

What each approach needs

A periodic approach needs:

• A count date, count sheets and a rule for deliveries that arrive during the count. The stocktake tool prints a sheet with a recount column.
• Purchase invoices kept in order, and a unit cost for each line so the count can be valued.
• A full count at least at year end; the year-end count guide covers that day.

A perpetual approach needs:

• A product list with one unique code per item, ideally the barcode on the pack.
• A POS or sales entry that removes units as they sell. The POS and stock guide explains how sales reach the record.
• Receiving that adds each delivery before it reaches the shelf, plus recorded returns, transfers and write-offs.
• Barcode scanners are optional but cut keying mistakes at checkout and in the stockroom.

Perpetual inventory with cycle counts

Most small shops end up with a hybrid. They keep the running record for daily decisions and count a small part of the shop every week, so each area is checked several times a year rather than once. When a count disagrees with the record, they recount, find the cause where they can and correct the record with a reason. The full count at year end becomes a check rather than the only source of truth. The cycle counting guide sets out a rotating schedule.

Switching from periodic to perpetual

1. Clean the product list so every item has one code and duplicates are merged.
2. Decide how sales reach the record: deducted by the POS, imported from a sales export, or entered by hand.
3. Agree who records deliveries, returns, transfers and breakage, and when.
4. Take an opening count on a quiet day. That count becomes the starting balance for every product.
5. After the first month, count a sample of lines and compare them with the record to see which movements are being missed.
6. Start a cycle count rotation once the record holds steady.

Tell your accountant before you switch, so the opening count, the costing method and the books line up.

Where Headoffis fits

Headoffis keeps a running stock record by location. Reviewed sales, entered by hand or imported from a POS sales CSV of up to 100 lines, deduct stock. Stock sessions record counts, receipts and transfers of up to 100 lines and show every old and new balance before you save, and count sessions import the stocktake tool's CSV. Headoffis does not sync live with a POS or calculate cost of goods sold, valuation or profit. The inventory help describes the stock actions.

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