Periodic System

Question: In a periodic system, no attempt is made to keep an ongoing record of a company’s inventory. Instead,

the quantity and cost of merchandise is only determined periodically as a preliminary step in preparing financial statements.

How is the actual recording of an inventory purchase carried out in a periodic system?

Answer: If a company uses a periodic inventory system, neither the cost nor the quantity of the specific inventory

items on hand is monitored. These data are not viewed by company officials as worth the cost and effort

required to gather it. However, transactions still take place and a record must be maintained of the costs incurred.

This information is eventually used for financial reporting but also—more immediately—for control purposes.

Regardless of the recording system, companies want to avoid spending unnecessary amounts on inventory as well

as tangential expenditures, such as transportation and assembly. If the accounting system indicates that a particular

cost is growing too rapidly, alternatives can be investigated before the problem becomes serious. Periodic systems

are designed to provide such information through the use of separate general ledger T-accounts for each cost

incurred.