A perpetual stock system updates the stock record and cost of sales every time goods come in or go out, so a book stock figure is available at any moment. A periodic system posts purchases straight to the profit and loss account and works out cost of sales only when stock is counted, as opening stock plus purchases less closing stock. Both are acceptable in UK accounts; what company law and HMRC need is a reliable year end stock figure, supported by a count, and valued at the lower of cost and estimated selling price less costs to complete and sell.

What is the difference between a perpetual and a periodic system?

The difference is when cost of sales is recognised and where the stock figure comes from.

  • Perpetual. Each purchase is debited to a stock account in the balance sheet. Each sale triggers a second entry that moves the cost of the item sold from stock to cost of sales. The stock account, item by item, should always show what is on the shelves.
  • Periodic. Purchases are debited to a purchases account and no cost is matched to individual sales. Stock in the balance sheet stays at last year’s figure until the next count, when a closing stock adjustment is made.

The accounting standard does not prescribe either. FRS 102 paragraph 13.20 simply requires that when inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised. A perpetual system does that sale by sale; a periodic system does it in one adjustment at the period end. If the count, the cut off and the valuation are right, both produce the same profit.

How does a periodic system record purchases and cost of sales?

During the year every invoice for goods for resale is posted as debit purchases, credit trade creditors (or bank). Sales are posted as debit debtors or bank, credit sales, with no cost entry at all. At the year end three things happen:

  1. Last year’s closing stock, which has sat in the balance sheet all year, is transferred out: debit cost of sales, credit stock.
  2. The stock is counted and valued.
  3. The new figure is brought in: debit stock, credit cost of sales.

ACCA’s technical guidance on year end adjustments sets out the resulting formula: cost of sales is opening inventory plus purchases minus closing inventory, so closing inventory is a credit to cost of sales and a current asset in the balance sheet. The same structure appears on the sole trader return. HMRC’s notes to the full self employment pages (SA103F) say that box 17, cost of goods bought for resale or goods used, needs adjusting for opening and closing stock where traditional accounting is used.

The weakness is that cost of sales is a balancing figure. Anything missing from the count, whether stolen, damaged, given away or simply not counted, is silently treated as sold. The system cannot tell you what shrinkage was.

How does a perpetual system record each movement?

A perpetual system posts the cost side of every transaction:

Event Debit Credit
Goods bought on credit Stock Trade creditors
Goods returned to supplier Trade creditors Stock
Goods sold Debtors or bank (selling price) Sales
Same sale, cost side Cost of sales Stock (at cost)
Count shows a shortfall Stock losses (usually within cost of sales) Stock

The cost removed on each sale has to follow a permitted cost formula. FRS 102 paragraph 13.18 allows first in, first out or weighted average cost, requires the same formula for inventories of a similar nature and use, and does not permit last in, first out. Items that are not ordinarily interchangeable must use specific identification under paragraph 13.17. Our page on inventory cost formulas explains how each works inside stock software.

What does a worked example look like?

Illustration only. A shop starts the year with stock costing £8,000, buys goods costing £50,000 and sells goods for £80,000. Its till and stock system records the cost of items sold as £47,000, so book stock at the year end should be £11,000. The year end count finds stock costing £10,200.

Periodic Perpetual
Sales 80,000 80,000
Cost of goods sold 47,800 (8,000 + 50,000 less 10,200) 47,000
Stock loss identified Not visible 800
Total cost of sales 47,800 47,800
Gross profit 32,200 32,200

Profit is identical. The difference is information: the perpetual system shows that £800 of stock went missing, which the owner can investigate, while the periodic system buries it in cost of sales. The loss is only identified because a count was still done.

Do you still need a stocktake if you keep perpetual records?

Yes. Company law and auditing practice both assume a physical count.

  • Section 386(4) of the Companies Act 2006 requires a company dealing in goods to keep statements of stock held at the end of each financial year and all statements of stocktakings from which those statements were prepared.
  • ISA (UK) 501, paragraph A1, says management ordinarily counts inventory at least once a year, both as a basis for the financial statements and, where relevant, to check the reliability of a perpetual inventory system.
  • Paragraph A9 of the same standard accepts that counts may be done at dates other than the balance sheet date, whether quantities come from an annual count or a perpetual system, provided controls over stock movements are effective. Paragraph A10 notes that differences between perpetual records and counted quantities may indicate that those controls are not working.

In practice, businesses with good perpetual records often count a section of the warehouse every week or month, correct the records as they go and rely on the book figure at the year end, rolled forward from the last count. A business with a periodic system has no such option: without a full count at or near the year end it has no closing stock figure at all.

What do company law and HMRC require whichever system is used?

For companies, section 386(4) also requires statements of all goods sold and purchased, identifying the goods, buyers and sellers, except for goods sold by way of ordinary retail trade. Section 388(4) requires those records to be kept for three years from the date they are made by a private company and six years by a public company.

For sole traders using traditional accounting, GOV.UK guidance on business records says the records must allow the tax return to include the value of stock and work in progress at the end of the accounting period. A business on the cash basis is different. HMRC’s Business Income Manual at BIM72005 explains that, because income and expenses are recognised when received and paid, there is no need to account for debtors, creditors, stock and work in progress, and that the cash basis is the default method unless an election is made. Stock purchased is simply an expense when paid. See cash basis vs accruals accounting for when each applies.

Whatever the system, the year end figure must then be valued correctly. FRS 102 paragraph 13.4 requires the lower of cost and estimated selling price less costs to complete and sell; our page on stock valuation covers that test.

Which system suits which business?

  • Perpetual suits businesses with stock software, barcodes or an ecommerce platform, valuable individual items, manufacturing with bills of materials, or lenders who want monthly stock figures. It is also what makes accurate monthly closing entries possible without a count each month.
  • Periodic suits small businesses with low value, high volume lines, such as cafes, market traders and small builders’ merchants without stock software, where tracking every issue would cost more than it saves.
  • Estimation techniques sit between the two. FRS 102 paragraph 13.16 allows the standard cost method, the retail method or most recent purchase price if the result approximates cost; the retail method reduces the sales value of stock by the appropriate gross margin percentage. Retailers often count at selling price and convert to cost this way.

What mistakes come up most often?

  • Trusting the book figure without counting. Software records drift through mis scans, returns not booked back and goods written off without an entry. A negative stock quantity in the system is a sign the records are wrong, not that stock has been oversold.
  • Poor cut off. Goods received before the year end but invoiced after, or invoiced but not delivered, are counted in one place and missed in the other.
  • Mixing non stock items into purchases. In a periodic system, overheads coded to purchases inflate cost of sales and distort gross margin.
  • Ignoring goods taken by the owner. Stock taken for personal use reduces stock without a sale; see goods taken for own use for the tax rule.
  • Keeping no count sheets. Section 386(4) requires the stocktaking statements themselves to be kept, not just the final total, and they are the first thing an HMRC officer or auditor will ask to see when questioning margins.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.