Restaurant365 uses the process of Periodic Inventory rather than Perpetual Inventory for several reasons. Perpetual Inventory serves as a one-to-one relationship, where an item is bought and sold as one product. Because of this, Perpetual Inventory Debits the Inventory Account when counted and then Credits the COGS account when each product is sold.
Conversely, Periodic Inventory accounts for raw goods that may not be completely used or that may be combined together. Because of this many-to-one relationship, there is a higher need to track these materials frequently. Periodic Inventory relies on the equation 'Beginning Inventory + Purchases - Ending Inventory', so it credits the COGs Account immediately to ensure that the P&L Statement and Balance Sheet are tied out correctly and uses weekly/biweekly/monthly Inventory Counts to track the usage of these goods.
Factors that Impact Inventory
While many other forms of Accounting rely on Perpetual Inventory, the following details the factors that make a Restaurant Operation different than other forms of accounting:
- Many-to-One Relationship. Because purchased raw ingredients are most often used in Recipes, Customers are buying one single recipe made of many ingredients. Even more, one ingredient could be used in multiple recipes.
- Discrepancies in Usage. Inaccuracies in usage can arise due to the following, among others:
- Parts of a raw ingredient are thrown away after Prep
- Measurements are not taken accurately
- Ingredients are wasted
- Human Error. Since multiple Employees have a hand in entering in Menu Items on the POS, it is up to each individual to make decisions about entering in customized items or handling discounts when necessary.
- Subjective Units of Measure. When using a recipe or counting Inventory, Units of Measure are highly subjective and may not be correctly used or counted, respectively.
- Potential Inconsistent Delivery. Purchased Menu Items may not always be delivered with consistency. For example, a box of 10 chicken tenders may sometimes include 11 or a slice of cheese may not be included on a sandwich.
By conducting Inventory Counts regularly, Managers and Owners have more control over the cost of goods and can assess any discrepancies with accuracy. Even further, by immediately debiting the COGS Account, the Periodic Inventory can determine how many raw goods are truly used at the end of each week or month, allowing for a better reflection of the actual business financials.