A description of a period inventory system, a way for businesses to keep track of their purchases, debits, and credits.
A period inventory system is also known as a periodic inventory system, depending on who is using it. The system is used by accountants and those in the business world to keep track of their purchases. It also allows them to keep track of any debits to their account and credits to their account.
The system has five separate areas laid out on a spreadsheet. The first area is for the date of the purchase. The second area is for the purchase itself, with space for the user to list any purchases made from one specific company. The individual can choose to list each purchase on a separate line in an itemized list, or list all of their purchases on one line. The third line is for accounts payable, where the user lists the name of the company or business where they purchased their items. The fourth line is the debit line. In this area, users list the total amount owed. The last line is for credits, which indicates when they've paid a company. At the bottom of the screen are the totals, which allow users to see what they owe and what they've paid.
This type of periodic inventory system is also used by companies that produce or sell goods. In this scenario, the lines have slightly different meanings. The accounts payable line, for example, refers to the person or company that purchased products, as opposed to the company those items were purchased from. The debit line can refer to the amount of money owed or the cost of the items, while the credit line refers to any payments made by the company. At the end of the spreadsheet the user can see who owes them money, who has made payments, and the total amount of money still owed.
In a periodic inventory system, the purchases line changes constantly. It updates itself every time a new purchase is recorded. There is also the option of having an inventory section on the system. The inventory line only updates itself at certain times, with the user picking the time period. Many users choose to update the system every week, month or a few times a year. It allows the user to see how much stock they have remaining, and when they need to make a new purchase or order. It's worth noting that since the inventory area doesn't update as often as the purchases do, it can be difficult to keep track of the stock.
With a periodic inventory system, cash purchases are the only ones tracked. It doesn't track credit accounts or those purchases made by check. The user needs to enter in the inventory information every few months or when they program the system to update. In other words, if the user sets up the system to update every three months, then they need to enter in the inventory numbers at this time. However, the system does update itself on those specific dates, to change the inventory levels according to the purchases made during that time period.