periodic inventory system
Picture a small corner store with no scanner. The owner buys boxes of goods through the year and just sells over the counter, scribbling nothing about what leaves the shelf. To find out how much was sold and what is left, every few months the family closes early and physically counts everything in the shop. That count-it-when-you-need-it approach is the periodic inventory system.
In a periodic system, the inventory account is not touched during the period. Purchases of goods are recorded in a separate 'purchases' account, and sales are recorded as revenue without removing cost at the time of each sale. Only at the end of the period does the business physically count what remains and then work backward: cost of goods available for sale (beginning inventory plus purchases) minus the ending count equals cost of goods sold. So if you started with 2,000, bought 8,000 more, and counted 3,000 left, then cost of goods sold is 2,000 + 8,000 − 3,000 = 7,000.
It matters because it is cheap and simple — no scanning system or constant bookkeeping needed — which is why small or low-tech businesses still use it. But it has real weaknesses: between counts the books cannot tell you current inventory or up-to-date cost of goods sold, and because the figure is a residual, any theft or spoilage silently gets buried inside cost of goods sold rather than flagged as a loss. As technology got cheap, most larger businesses moved to perpetual systems.
A market stall begins the quarter with 2,000 of inventory and buys 8,000 more during the quarter, recording nothing about each sale's cost. At quarter-end the owner counts goods worth 3,000 still on hand. Cost of goods sold is computed as 2,000 + 8,000 − 3,000 = 7,000 — a single backward calculation done once.
Cost of goods sold is found once at period-end by subtracting the count.
Because cost of goods sold is a residual, the periodic system buries theft and spoilage inside it — anything missing from the count is automatically treated as 'sold', so losses are hidden rather than highlighted.