What Is a Periodic Inventory System?

A periodic inventory system, as GAO's 2002 executive guide on physical inventory counts for federal agencies describes it, tracks receipts and shipments in a purchases account and infrequently updates item balances. GAO contrasts it with a perpetual inventory system, which maintains current item balances by recording receipts and shipments.

Because item balances are not kept current, a periodic system depends on a count. In GAO's description of the wall to wall approach, the entire inventory is counted at a point in time, usually as of the end of an annual or interim period, and at the private-sector companies it studied, GAO found wall to wall counts were primarily used to establish a balance on or as of a certain date for financial reporting.

The IRS lays out the cost of goods sold arithmetic on Schedule C (Form 1040), lines 35 to 42:

• Inventory at beginning of year
• Plus purchases, cost of labor, materials and supplies, and other costs
• Equals the cost of goods available for sale
• Minus inventory at end of year
• Equals cost of goods sold

IRS Publication 334 adds that your ending inventory will usually become the beginning inventory of your next tax year. As of October 28, 2026, these lines come from IRS Publication 334 (for use in preparing 2025 returns), and the loss rule below from IRS Publication 538 (revised January 2022). This is general information, not tax or accounting advice.

• Periodic: receipts and shipments are tracked in a purchases account, and item balances are updated infrequently.
• Perpetual: current item balances are kept by recording receipts and shipments. GAO says a perpetual system is needed for cycle counting, to provide current balances for reconciliation of the system and physical count quantities.

Inventory losses can end up inside cost of goods sold. IRS Publication 538 says you can claim a casualty or theft loss of inventory through the increase in the cost of goods sold by properly reporting your opening and closing inventories, or claim it separately as a casualty or theft loss, adjusting opening inventory or purchases to avoid counting the loss twice.

A distributor of janitorial supplies closes its year:

• Inventory at beginning of year: $40,000
• Purchases during the year: $95,000
• Cost of goods available for sale: $40,000 + $95,000 = $135,000
• Year-end count: $38,500
• Cost of goods sold: $135,000 minus $38,500 = $96,500

The $38,500 counted at year end usually becomes next year's beginning inventory.

Shopify keeps item quantities by location, and two of its inventory reports give a month-end view:

• Month-end inventory snapshot: displays the quantity of each product variant you had in stock at the end of each month.
• Month-end inventory value: multiplies the cost per item by the ending quantity for each product variant, and the sum of these values displays in the Summary row.

Shopify's setup guide says you can adjust quantities later as you complete physical inventory counts.

Uncap Connect keeps your store and your ERP in real-time, two-way sync, and your ERP stays the system of record. Inventory, orders, customers, and pricing move the moment they change, not in an overnight batch.

• Cost of goods sold (COGS)
• FIFO
• LIFO
• Inventory turnover ratio
• Warehouse management system (WMS)

• GAO-02-447G: Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property
• IRS Publication 334: Tax Guide for Small Business
• IRS Publication 538: Accounting Periods and Methods (Inventories)