What is "periodic" inventory tracking?

Periodic inventory tracking is designed to be a fairly simple way to get your annual taxes done properly. For any sellers that have had to fill out Part III of a Schedule C, this option will look familiar.

The process

Rather than trying to track the cost of every inventory item from purchase through sale (like continuous inventory tracking) or writing off each item when you buy it (cash-based inventory,) here, you simply track your inventory purchases throughout the year, but only calculate cost of goods after doing a periodic count of your unsold inventory.

Step 1: Purchase inventory

Whether you are importing inventory purchase transactions from a bank or credit card, or manually recording inventory, you'll want to categorize them as "Inventory." This treats the movement of money from one balance sheet account to another and does not impact your Profit and Loss yet. Why? Because under periodic inventory, you don't write off "cost of goods sold" until items are sold.

Step 2: Count your unsold inventory

Periodically (monthly, quarterly, yearly or other), you will need to add up the cost of your unsoldinventory. At minimum, you need to do this at least once per year at the end of the year (e.g. last year's "Inventory at end of year" should equal this year's "Inventory at beginning of year.")

You can choose do count your inventory more often than yearly, which is why this method if called periodic and not annual.

Step 3: Update the current inventory balance in Seller Ledger

Simply record the total cost amount of your unsold inventory in Seller Ledger. We'll update your Inventory account balance (and take care of Step for you automatically.

Step 4: Calculate Cost of Goods Sold and record an adjusting entry

Here is where the math happens and it's pretty straightforward. Using the three amounts previously mentioned (opening balance for the year, total purchases for the year and the unsold balance you just entered), Seller Ledger calculates cost of goods sold using the following formula - straight from the IRS tax form:

Cost of Goods Sold = Beginning balance + Purchases - Ending balance

Not only do we calculate the cost of goods sold amount, we automatically record the adjusting journal entry for you to make sure the formula matches, updating your P&L and balance sheet in the process.

For more help in using this option, please consider checking out:

• How do I enter my Beginning of Year balance?
• How do I calculate and record Cost of Goods Sold at the end of year?
• If I enter a Beginning of Year balance, what happens if I want to go back and enter older inventory I bought from prior years?