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Periodic Inventory System

A periodic inventory system, as the name suggests, provides a periodic balance of the inventory account only at the end of an accounting period such as March 31st, 2009 which is the end of first quarter for most large corporations. Periodic inventory system does not update the inventory account after every transaction. The cost of new purchases of merchandise is recorded in a temporary expense account known as Purchases. When merchandise is sold, revenue is recorded but the cost of the merchandise sold is not yet recorded as cost. When financial statements are prepared at the end of the year, the company takes a physical inventory count of its entire warehouse(s). Each item on this physical inventory count is assigned a cost, and total inventories are tabulated.

Periodic inventory systems were largely used by large hardware, drug & department stores that sold large quantities of low-value items such as shampoo, soap, toothpaste, etc. Without today’s Point of Sale (POS) scanners, computers and cameras, it was not feasible enough for accounting systems to track such small items.

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