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Perpetual Method and Periodic Method

Last updated 03/01/2019

There are two different accounting methods for inventory - this article explains the differences between them.

Overview


Choosing the correct method to account for your inventory is perhaps the most important decision you will make when setting up Cin7 with your accounting software - but it is perhaps the one that is most often overlooked.

Cin7 works in combination with your accounting software - they are two sides of the same coin. They must be set up correctly in order for the two to work correctly.

Please consult with your accountant before making any decisions that will affect your accounting - Cin7 provides this information for reference only; it does not constitute financial advice.

There are two main methods of accounting for inventory, Periodic and Perpetual. Which method you choose really depends on your circumstance.

It is worth noting that neither method inhibits Cin7's reporting of Gross Profits, or the ability to see an accurate stock valuation at any time in Cin7. The important thing is choosing a method that is realistic given the resources you have to maintain it, and ultimately a method that you understand.

The Periodic method


The Periodic method is the classic method of accounting for inventory. It requires little administration and was the preferred method before computers made more detailed accounting methods desirable.

When using the Periodic method, Purchases go to a dedicated expense account on your Profit and Loss statement.

This account is a running balance of purchases made throughout the accounting period.

At the end of the financial period, the remaining inventory is counted and the value of the stock is journaled to the Balance Sheet as an Asset.

Having a stock on hand value allows the following calculations to take place:

Opening Inventory Balance + Purchases - Closing Inventory Balance = Cost of Goods Sold

Sales - Cost of Goods Sold = Gross Profit

The Periodic method is suited to those who are already comfortable with this method and need a less administration intensive accounting process.

Cin7's Accounting Specialists will set up your integration to work seamlessly with your accounting software, but for more information on how they will do this, please see Configuring your Xero Integration - Periodic Method.

The Perpetual Method


A more common approach is to use what is known as the Perpetual method of inventory accounting. As the name suggests, the inventory balance is perpetually updated.

With the Perpetual method, Purchases go directly to the Inventory Asset account on your Balance Sheet.

When you make a sale, the cost of the goods for that sale are reduced from the Inventory account and are entered into the Cost of Goods Sold account on the Profit and Loss statement.

Therefore Gross Profit can be calculated using the equation:

Sales - Cost of Goods Sold = Gross Profit

Because the Cost of Goods Sold account is always up-to-date, your gross profit figure can be calculated accurately at any time throughout the month.

The Perpetual method should be chosen if you require more detailed accounts, have a clear understanding of how this method works, and require the ability to view your stock on hand values and gross profit at any point in time from your accounting software (they will always be visible from Cin7).

Cin7's Accounting Specialists will set up your integration to work seamlessly with your accounting software, but for more information on how they will do this, please see Configuring your Xero Integration - Perpetual Method.