Also known as a cycle count, a periodic inventory is the process of conducting a physical count of all items contained within an inventory at specific intervals during the tax or calendar year. The idea behind this type of activity is to identify any issues with the inventory, and make the necessary corrections to keep the overall value of the inventory accurate. This type of activity also makes it possible to determine if current issuing processes are functioning properly, and if any shifts in ordering processes are needed in order to maintain the proper amounts of specific items in stock.
The process of conducting a periodic inventory begins with assessing the current number of each item that is supposed to be in stock. This is managed by comparing the amount listed on inventory listings with what is physically present in the areas where the inventory is maintained. If there is any variance in the two figures, notations are made of the difference. This makes it possible to correct the listings to reflect the physical count, a process that is usually referred to as inventory reconciliation.
Many businesses utilize the periodic inventory method as a means of maintaining inventory records. Companies often break down the process so a portion of the overall inventory is physically counted every six to eight weeks. Larger companies may choose to conduct monthly inventories, depending on the complexity of the task. For example, textile companies often log equipment and parts maintained in an inventory into what is known as material codes; every six weeks or so, a selected number of material codes are inventoried, making it possible to physically count all the codes over the course of the year. Along with these periodic counts, a full-blown annual inventory is also conducted, normally just at the end of the company’s fiscal year.
While a periodic inventory approach is sometimes used in lieu of maintaining real time records of receipts and disbursals from an inventory, that is not always the case. Many companies do maintain constant records, and use the periodic inventory as a means of isolating errors that may occur, such as the failure to record a disbursal from the inventory. By conducting the physical count on a regular basis, it is possible to identify the differences, possibly find the origin of the problem, and make changes that will prevent a recurrence of those same circumstances. As an added benefit, the periodic inventory also makes it possible to accurately calculate any taxes that may apply to the value of the total inventory.