 In this discussion, we will discuss the discussion question of describe the difference between a periodic and perpetual inventory system. If we see an essay question such as this, we're basically looking at two terminologies that we will then combine and compare and contrast. So we're talking about a periodic system and a perpetual inventory system. Obviously, one of the approaches we could do here is to define these two types of systems. Now, because these are kind of closely related, a periodic and a perpetual system, part of the definition of them might be used or we can use a comparison between them in order to define what these two things are. So a periodic system, if we're talking about a periodic inventory system, it means that, of course, we're only tracking or recording the inventory periodically, and a perpetual inventory system, by contrast, would mean that we are recording the inventory perpetually as we go in a perpetual process. So why would that be the case? How would this happen? And just from a practical standpoint, we typically have more of a periodic system when we have a less sophisticated system oftentimes, and the periodic system for small businesses could be something that would be useful because it doesn't take as much components in the system, doesn't take as much work, as much data input to do a periodic system, whereas a perpetual inventory system, of course, takes more data input and more tracking as we go through the process. Why would that be? When we think of most problems in a textbook, we think of a perpetual inventory system most of the time, meaning when we make a sale, there's basically two components that happen if we are a merchandising company. One is that if we made a sale on account, we debit accounts receivable and we credit sales or revenue, that first piece is the same as would be there if we were a service company. Then there's the second component, which is the reduction of inventory. We're selling the inventory and we're recording the related cost, the related expense to that sale of inventory called cost of goods sold. It's that second component that adds more complexity here. Why? There's a couple of different reasons for it. One is that if we think about a store or something like that, if someone picks something up in the store and it has a sticker on it, that's the sticker price, and if it says $100 on it, that's how much it costs. If you ring it up and you ask them to pay you, they can give you that $100 and you can record right there. Usually you got cash, you got paid, cash would go up, the other side would be revenue would go up. We know exactly what that is. However, the cost side, whatever that inventory item cost isn't given to you. It's not on the sticker price clearly and therefore we would have to basically know that. So every time we sell something, we need to know more than just the sticker price. We would need to know the cost of goods sold and in order to record the other half, the debit to cost of goods sold and the credit to inventory. Oftentimes if we want the cashier or someone or our selling process to be as easy as possible, I don't want to have to worry about as many components. So therefore when we're making the sale, we're concentrated on the sale process and therefore we may not be recording on every sales component, sales transaction, the other side of it or that would be a periodic system in which we would not record it. If we had a computer, however, as we do in like a grocery store or something like that, which basically records the other component, the cost side without us needing to know it, meaning we can be the cashier and just ring up the price and ask for how much money is owed to us while the system being sophisticated enough to record the transaction and track the inventory, record the cost of goods sold, record the reduction in inventory perpetually as we go, then that's going to be a good system. So that's going to be in practicality when the difference would happen in a periodic system. If we don't have a computer system that's going to help us out with that process, what we could do is we could just calculate the sales half as we go through the whole process and then we can count the inventory at the end of the system and say, okay, well, we started with this many units. This is how many units are left at the end of the day, the week or the month, some type of period of time and the difference then we presume to be what we sold and then we can then we can record the cost of goods sold in the inventory periodically, daily, weekly, monthly at that point in time when we do the physical count by doing the physical count and figuring out what the cost of goods sold was.