Periodic inventory, or cycle counting, involves physically counting inventory at set intervals to identify issues and make necessary corrections. It helps determine if ordering processes are working and allows for inventory reconciliation. Companies may use it to isolate errors and accurately calculate taxes.
Also known as cycle counting, a periodic inventory is the process of performing a physical count of all items contained in an inventory at specified intervals during the fiscal 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 inventory value accurate. This type of activity also allows you to determine if current ordering processes are working properly and if changes to ordering processes are needed to keep adequate quantities of specific items in stock.
The process of taking a periodic inventory begins with assessing the current number of each item that should be in stock. This is managed by comparing the amount listed on inventory listings to what is physically present in the areas where inventory is held. If there is any variation in the two figures, notations of the difference are made. This makes it possible to correct listings to reflect the physical count, a process that is often referred to as inventory reconciliation.
Many companies use the periodic inventory method as a means of keeping inventory records. Companies often stop the process so that a portion of the general 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 record equipment and parts held in an inventory in what are known as material codes; approximately every six weeks, a selected number of material codes are inventoried, making it possible to physically count all codes throughout the year. Along with these periodic counts, a complete inventory is also conducted, usually at the end of the company’s fiscal year.
Although a periodic inventory approach is sometimes used in place of keeping real-time records of inventory receipts and disbursements, this is not always the case. Many companies keep constant records and use periodic inventory as a means of isolating errors that may occur, such as failure to record an inventory disbursement. By performing the physical count regularly, it is possible to identify the differences, possibly find the source of the problem and make changes that prevent the recurrence of these same circumstances. As an added benefit, periodic inventory also allows you to accurately calculate any taxes that may apply to the total inventory value.
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