Question

What types of organization might use the periodic system? Why?

Answer 1

Firstly, to begin with, the periodic inventory system is a system of accounting inventory in the books of accounts on a periodic basis.

There are mainly two kinds of inventory systems i.e perpetual inventory system which is the most commonly used system of recording inventory in most kind of business as it reflects a true and fair view of inventory levels in the company at a given point in time. Whereas, on the other hand, the periodic inventory system of accounting includes inventory in the books of accounts periodically i.e quaterly, half yearly or yearly depending on the company's policy. Periodic inventory management only records the stock count at the beginning of the period. Purchases and sales of inventory for the entire period are instead recorded on the statement of financial position. This means that the cost of goods sold does not continuously exist. Rather it is determined at the end of the period. Because a periodic approach to inventory control is simpler and less expensive to initially set up, it can be a particularly appealing option to a small business.This system has a lot of drawbacks as inventory might go unrecorded, major chances of theft and error, or merely human error to account for the invetory in the books.

Usually companies dealing with large volumes of stock adopt the periodic inventory system in order to reduce the labour costs and to reduce the time taken on inventory counts. Organisations like supermarkets, wholesalers, etc, opt for this system as they have a lower budget and their main aim is to minimise costs and maximise the profits earned. Although, larger organisations and public companies cannot choose this method of inventory system as the stakeholders are large and the company owes an explanation to them.