Periodic vs Perpetual Inventory Costing: A Worked Example

Periodic and perpetual inventory systems differ in when cost of goods sold (COGS) is calculated. A perpetual system costs each sale on its sale date. A periodic system waits until period-end and allocates all available costs. First-in, first-out (FIFO) gives the same answer under both, as long as there is no shrinkage. Last-in, first-out (LIFO) and average cost can differ when a purchase follows a sale.

Prefer to watch first? In the video above, Professor Farhat works through a perpetual vs periodic inventory example. Then try pricing the April 9 sale in the inventory record below before you read the solutions. Watch Professor Farhat’s explanation on YouTube.

What Is the Difference Between Periodic and Perpetual Inventory Systems?

A periodic inventory system updates the Inventory account only at the end of the period. During the period, purchases go into a separate Purchases account. After a physical count, the company calculates cost of goods sold with one formula: COGS = beginning inventory + net cost of purchases − ending inventory. Net cost of purchases includes freight-in and deducts purchase returns, allowances, and discounts.

A perpetual inventory system updates the Inventory account after every purchase and every sale. The record always shows the units and cost on hand, and COGS is recorded on each sale date.

Shrinkage means inventory lost to theft, damage, or recording errors. A wrong count flows straight into income, as the inventory errors example shows.

Periodic vs perpetual inventory costing starts with two decisions

A system answers when the accountant updates the inventory cost record. A method answers which costs the accountant assigns. “Perpetual” alone does not tell you the price of a unit sold. A perpetual record can use FIFO, LIFO, or moving average. The comparison of inventory cost flow assumptions explains what each method assigns.

Read a problem in that order. For a periodic calculation, total the opening inventory and all purchases, count what remains, and allocate the available costs. For a perpetual calculation, put the transactions in date order and update the cost balance after each one. A purchase made after a sale belongs only to the record from its purchase date forward.

Build the inventory record

Consider a hypothetical bicycle shop that stocks one model of repair kit. All units are interchangeable. It records one sale in April and receives another delivery later in the month. Assume no shrinkage, returns, or discounts.

April has 36 units available in total and 15 units sold, so 21 units remain. Available cost equals $120 + $168 + $216 = $504. Every solution below must account for the same 21 units and $504. The selling price is unnecessary because the task measures COGS. Accountants call each batch bought at its own price a cost layer. This shop has three layers: $10, $14, and $18.

Why FIFO agrees and LIFO can differ

FIFO uses the oldest costs under either system

On April 9, a perpetual record uses the 12 opening units at $10 and three units at $14. COGS is $162. A periodic calculation begins with the same oldest 15 costs. Alternatively, build ending inventory backward from the most recent purchase. The 12 units at $18 and nine at $14 total $342. Subtract $342 from $504 to confirm COGS of $162.

LIFO depends on what “latest” means

Under perpetual LIFO, the latest costs available on April 9 are the 12 units at $14. The shop needs three more costs at $10, so expense is $198. The April 20 delivery never enters that sale. It joins the nine remaining $10 units, producing ending inventory of $306.

Under periodic LIFO, the latest costs available for April as a whole start with the April 20 purchase. Expense is (12 × $18) + (3 × $14) = $258. Ending inventory is 12 units at $10 and nine at $14, or $246. The shop still delivered the goods on April 9. Only the period-end cost allocation draws on the later invoice.

Exam tip: When a question says perpetual, cross out every purchase dated after the sale before you price that sale. A common mistake is pulling the April 20 units at $18 into the April 9 sale.

Periodic weighted average and perpetual moving average

For periodic weighted average, divide the entire month’s available cost by available units. Here $504 ÷ 36 = $14 per kit. Expense is 15 × $14 = $210, and ending inventory is 21 × $14 = $294.

For a moving average, combine opening inventory with the April 5 purchase before pricing the sale. The 24 kits cost $288, or $12 each. On April 9 the shop expenses 15 × $12 = $180 and keeps nine units costing $108. The April 20 delivery adds $216, leaving 21 units costing $324. The new unit average is approximately $15.43. Keep full precision when computing a later sale.

The IAS 2 discussion of weighted average in paragraph 27 describes both period-based averaging and recalculating as shipments arrive. The full standard may require a subscription; the public IAS 2 overview summarizes the permitted cost formulas. One difference matters if you follow IFRS: IAS 2 does not permit LIFO. Under IFRS, the two LIFO rows in the table above would not be allowed. U.S. GAAP still allows LIFO. Under U.S. GAAP, ASC 330-10-30-9 allows FIFO, average cost, and LIFO, and says the goal is to choose the method that most clearly reflects periodic income. For background, see the FASB staff’s December 2024 board meeting handout on LIFO (the LIFO paper starts on the second page). At that meeting, the FASB decided not to add a project to reconsider LIFO, as confirmed in the FASB Chair report included in the March 2025 FASAC meeting materials.

What Journal Entries Do Periodic and Perpetual Systems Use?

Here are the cost entries for the bicycle shop under FIFO. The sale itself (debit Accounts Receivable or Cash, credit Sales Revenue) is the same under both systems, so only the cost side is shown.

Under the periodic system, COGS comes from the formula: $120 + $384 − $342 = $162. Both systems land on the same FIFO answer. They just get there at different times. The closing entries for a merchandising company show how the period-end entry fits into the full close.

Key Takeaways

• Ask two questions first: which system (periodic or perpetual) and which method (FIFO, LIFO, or average).
• A periodic system allocates all available cost, $504 here, at period-end between units sold and units left.
• A perpetual system prices each sale using only the cost layers on hand that day.
• FIFO gives $162 of COGS under both systems.
• LIFO gives $258 periodic and $198 perpetual. The $60 gap comes from the April 20 purchase.
• Average cost gives $210 periodic (weighted average) and $180 perpetual (moving average).
• Always check that COGS plus ending inventory equals the cost available.
• IFRS does not allow LIFO. U.S. GAAP does.

Practice questions

1. Which invoice caused periodic and perpetual LIFO to diverge?

2. What if all three batches were on hand before the only sale?

3. A student reports moving-average COGS of $180 and ending inventory of $294. Find the error.

Frequently asked questions

What Is the Difference Between Periodic and Perpetual Inventory?

A perpetual system updates inventory and records cost of goods sold on every sale date. A periodic system records purchases in a Purchases account and calculates cost of goods sold once, at period-end, after a physical count.

Does FIFO Give the Same Answer Under Periodic and Perpetual?

Yes. FIFO assigns the oldest costs first, and the oldest costs are the same whether you look on the sale date or at period-end. In this example, FIFO COGS is $162 under both systems.

Why Does LIFO Give Different Answers Under the Two Systems?

Perpetual LIFO can only use the costs on hand on the sale date. Periodic LIFO uses the latest costs of the whole period, including purchases made after the sale. Here, the April 20 purchase at $18 makes periodic LIFO COGS $258 instead of $198.

Is LIFO Allowed Under IFRS?

No. IAS 2 allows FIFO and weighted average cost, plus specific identification for items that are not interchangeable, but not LIFO. U.S. GAAP still allows LIFO under ASC 330. In December 2024, the FASB considered a project to reconsider LIFO and decided not to add it to its agenda. The FASB vs IASB comparison covers other differences.

Why Do Some U.S. Companies Still Use LIFO?

When prices rise, LIFO usually produces a higher COGS and lower taxable income. Under the LIFO conformity rule in Internal Revenue Code Section 472(c), a company that uses LIFO on its tax return must also use it in its financial reports to owners and lenders. Treasury regulations still allow non-LIFO figures as supplemental disclosures, such as in the notes to the financial statements. The FIFO vs LIFO example shows how the cost difference flows through taxes.

Does a sale change the moving-average unit cost?

A sale at the existing average removes units and dollars in the same proportion. The average per remaining unit stays the same, apart from rounding. A receipt at a different price changes the average.

Can two correct LIFO answers produce different gross profits?

Yes. If sales revenue is the same, the $60 difference in the shop’s expense produces a $60 difference in gross profit.

What should I do if a question gives only month-end totals?

Those totals can support a periodic calculation when the needed purchase layers are identified. To price transactions perpetually, you also need their sequence and the number of units in each sale.

About the author: Professor Mansour Farhat, CPA, CIA, DBA, teaches the accounting, CPA, and CMA lessons at Farhat Lectures and explains topics like this one on the Farhat Lectures YouTube channel. Read more about Professor Farhat.