Why some entities need to estimate inventory? Answer to this question will be given in this post
In perpetual inventory system, inventory account is updated continuously. At any time, inventory account can give the information about the inventory available and cost goods sold. However, in periodic inventory system, closing inventory is determined by physical stock count and application of relevant cost flow assumptions.
Physical stock counting is a time-consuming activity and most companies usually count the stock annually for the preparation of annual financial statements. Such companies need to estimate the closing inventory for interim reporting. For instance, a company needs to estimate the inventory at the end of a month or a quarter for monthly or quarterly reporting etc.
There are two methods for estimating inventory:
Both these methods of estimating inventory are explained in the next two chapters along with examples.