# Perpetual vs periodic inventory systems?

Please can someone explain the difference to me, I’ve been learning lifo fifo and weighted average methods, but I keep coming across these two terms in the questions and mocks?

Also, when they refer to specific identification valuation methods is that the same as the weighted costs mentioned above?

Perpetual inventory: COGS for each sale is recorded at the time of each sale.

Periodic inventory: COGS for all sales are recorded at the end of the period (e.g., year-end).

Perpetual FIFO gives the same COGS and ending inventory as periodic FIFO.

Perpetual LIFO gives COGS and ending inventory that are closer to FIFO COGS and ending inventory (respectively) than does periodic LIFO.

Perpetual average cost gives COGS and ending inventory that are closer to FIFO COGS and ending inventory (respectively) than does periodic average cost.

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You just explained it 10x easier than the text book thank you

You’re welcome.

S2000magician,

Could you explain conceptually why this only affects FIFO and not LIFO? I am having a tough time figuring this out.

Thanks,

You have it backwards: it affects LIFO (and average cost) but not FIFO.

Conceptually, in a periodic inventory system you use all of the goods available for the whole period (one year, for example) and determine which costs go to COGS (and, consequently, which go to ending inventory (EI)), whereas in a perpetual inventory system you use all of the goods available as of the date of each sale to determine the COGS for that sale.

Recalling that under FIFO the earliest costs go to COGS, you can see that the earliest costs are the same whether we look at individual sales on 1/15, 2/27, 4/18, 6/3, 8/22, 10/14, 11/11, and 12/23, or we wait until 12/31. The earliest costs are always the earliest costs, no matter when we look.

However, under LIFO, because the latest costs go to COGS, things are considerably different. Under a perpetual LIFO system, for the sale on 1/15, we have to assign costs from beginning inventory (BI) or purchases on or before 1/15; either way, we’re going to get some very early costs in COGS. Under a periodic LIFO system, it’s very likely that those costs will all remain in EI.

Similarly, under perpetual average cost, the early sales get average costs from the earliest inventory (BI or the earliest purchases).

Think of it this way: suppose that we have the sales dates given above and we make a final purchase of inventory on 12/28. Under periodic LIFO and average cost, at least some of the costs of that purchase will go into COGS (even though in reality we couldn’t have sold that inventory); under perpetual LIFO and average cost, none of the costs of that purchase will go into COGS (because it wasn’t available before any of the sales dates).

Magician has a great example. But here’s a visual that might help.

Picture one of those fru-fru drinks with incredients with different densities, so the drink looks like it has layers.

If you’re using FIFO, you’re essentially taking a straw and sucking from the bottom of the drink. In this case, whether you periodically add layers to the drink or make the drink all at once, you’ll still be drinking the layers in the same order (the one in which they were put in the glass).

Periodic inventory is like waiting until the drink is finished before you start sucking stuff through the straw. In contrast, Perpetual inventory is like waiting until one or more levels are in there, taking a sip, and then adding a few more levels, then taking another sip, and so on.

LIFO is like sipping from the top of the drink. So if you wait until the drink is finished (periodic inventory), you get a different order than if you wait until only the first few levels are in the glass before taking a sip, and then letting them put some more levels in, then taking another sip.

Great analogy!

I fixed the one goof.

Thanks - I edited the original so as not to lead folks astray.

The analogy took a lot of “research” to get down.

Great analogy!!!

If only it would work with beer as well, more my type of drink

Thanks for the explanation guys, needed an extra example to get me on the right track.