Periodic and perpetual methods
Overview
Find out about the periodic and perpetual methods of inventory accounting.
In Xero and QuickBooks Online, you’ll use either the periodic method or the perpetual method to calculate your cost of goods sold (COGS).
You must calculate your COGS to find your gross profit, which measures the profitability of the activities at the heart of your business, and your business’s ability to cover overheads. For product sellers, gross profit equals sales revenue minus COGS.
You and your accountant must decide which method is right for your business. Here’s a quick summary of each method, and how to set up your Xero or QuickBooks Online integration depending on which you choose.
Periodic method
The periodic method is available to Xero users only.
With the periodic method, you perform a stocktake at the end of your financial period to find your closing stock on hand (SOH). Then you can calculate your COGS for that period like this:
Opening SOH + Purchases - Closing SOH = COGS
The benefit of the periodic method is that it requires fewer accounts and journal entries in Xero. But you must perform manual stocktakes, and you can’t sync adjustments to Xero.
To set up your Xero integration for periodic inventory accounting, set the Inventory Method setting to Periodic and map each Default Account to a periodic method type of account. Find out more about setting up your Xero integration.
Perpetual method
The perpetual method is available to Xero and QuickBooks Online users.
With the perpetual method, you create an account in your chart of accounts which you credit each time you make a sale (and, conversely, debit each time you accept a return). You credit (or debit) that account for the landed costs of the units dispatched in the sale (or received in the return). The value of this account is your COGS.
The benefit of your perpetual method is continual visibility of your COGS, gross margin, and other financial indicators. But you must set up and manage additional financial accounts and journal entries, and sync your adjustments to Xero or QuickBooks Online.
To set up your Xero integration for perpetual inventory accounting, set the Inventory Method setting to Perpetual and map each Default Account to a perpetual method type of account. Find out more about setting up your Xero integration.
If you use QuickBooks Online, you must use the perpetual method. Follow our instructions on setting up your QuickBooks Online integration.
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- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB
- Zendesk publishing.4.log-2014405138.zip30 KB