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Periodical inventory is a system of accounting for inventory where the goods on hand are only determined by a physical count.

Unlike perpetual inventory systems, where inventory updates are made on a continuous basis, periodical inventory might be useful if you maintain minimal amounts of inventory and a physical inventory count is easy to complete.

Before implementing periodical inventory, you should discuss its suitability with your accounting advisor.

Using the periodical inventory system, when stock is purchased it's immediately expensed to a cost of sales account. When stock is sold, there is no entry to cost of sales. In order to be able to report the value of stock you have on hand, end of period journals must be recorded.

Here are two methods you can use based on how much detail you want to show in the cost of sales section of your Profit & Loss Statement.

 

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titleTo show the purchases account only in the Profit & Loss Statement

To show the purchases account only in the Profit & Loss Statement

  1. Create two accounts:
    • a Stock On Hand (Asset) account
    • a Purchases (Cost of Sales) account.
  2. Set up your inventory items:
    • select the options I BuyThis Item and I Sell This Item.
    • for the Expense Account for Tracking Costs select your Purchases (Cost of Sales) account.
    • Select a relevant Income Account for Tracking Sales.
      Here's our example:
      Example item setup

      UI Text Box
      typeinfo

      The I Inventory This Item option should never be selected when using this method.

  3. At the beginning of the financial year, if there's a balance in the Stock On Hand account you need to prepare a journal entry:
    • debit the Purchases (Cost of Sales) account
    • credit the Stock On Hand (Asset) account
    • the amount entered needs to be the value of the Stock on Hand as at the end of the previous financial year
      Here's our example:
      Example journal entry
      The effect of the general journal entry will leave the account with a zero balance.

  4. At the end of the financial reporting period, make an adjustment to the Purchases (Cost of Sales) account to reflect the value of stock still on hand.
    1. Perform a stocktake and accurately value the stock on hand at the end of the financial reporting period.
    2. Prepare a journal entry to reflect the value of stock counted in the stocktake:
      • debit the Stock on Hand (Asset) account
      • credit the Purchases (Cost of Sales) account
      • the amount entered should be the value determined in the stocktake.
        Here's our example:
        Example journal entry
  5. Print the Profit & Loss Statement and Balance Sheet reports.
  6. On the first day of the next financial period, prepare a journal entry to reverse the effects of the closing stock adjustment.
    • debit the Purchases (Cost of Sales) account
    • credit the Stock on Hand (Asset) account
    • the amount entered should be for the same value entered in Step 4.
      Example journal entry

After the journal entry has been performed, the Stock on Hand (Asset) account should be returned to a $0 balance. At the end of future financial reporting periods, repeat Steps 4 and 5 to accurately reflect the true Cost of Sales figure in your Profit & Loss Statement and show the value of stock on hand in the Balance Sheet.

UI Expand
titleTo show the opening and closing stock accounts in the Profit & Loss Statement

To show the opening and closing stock accounts in the Profit & Loss Statement

  1. Create the following accounts:
    • Opening Stock (Cost of Sales)
    • Closing Stock (Cost of Sales) 
    • Purchases (Cost of Sales)
    • Stock on Hand (Asset) account 
  2. Set up your inventory items:
    • select the options I BuyThis Item and I Sell This Item
    • for the Expense Account for Tracking Costs select your Purchases (Cost of Sales) account
    • select a relevant Income Account for Tracking Sales
  3. At the beginning of the financial year, create a journal entry to show the Opening Stock balance in the Profit and Loss statement:
    • debit the Opening Stock (Cost of Sales) account
    • credit the Stock on Hand (Asset) account
    • the amount entered should be the value shown as Stock on Hand in the Balance Sheet.
      Here's our example:
      Example journal entry
  4. During the month, record your purchases and sales as per usual. Make sure that the allocation account used for Service purchases is the Purchases (Cost of Sales) account.
  5. On the last day of the month, perform a stocktake and value your stock on hand and enter a journal entry to record this:
    • debit the Stock on Hand (Asset) account
    • credit the Closing Stock (Cost of Sales) account
    • the amount entered should be the value determined in your stocktake.
      Here's our example:
      Example journal entry
  6. On the first day of the next month, create a journal entry to reverse the closing stock entry:
    • debit the Opening Stock (Cost of Sales) account
    • credit the Stock on Hand (Asset) account
    • the amount entered should be the previous month's closing stock value.
      Here's our example:
      Example journal entry
  7. Enter a year-end adjustment to reverse the impact on the opening stock and closing stock expense accounts.
    • debit the Closing Stock (Cost of Sales) account
    • credit the Opening Stock (Cost of Sales) account
    • the amount entered should be the same amount as entered in steps 5 and 6
      Here's our example:
      Example journal entry with year-end adjustment option highlighted

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      If this journal entry isn't recorded, the opening and closing stock will increase every time you enter an end of month journal.

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titleRelated topics
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Create detail and header accounts

Creating items

Recording a journal entry

Enter end-of-year adjustments

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