Why inventory isn't reduced every time you make a sale

Imagine standing at the till of a small shop as a sale goes through. A customer buys a bag of rice for RM8, pays cash and walks out. It feels natural to assume that the accounts have just struck the rice off the inventory records and recorded its cost as an expense.

Many students think inventory should go down with every sale. But the accounts that IGCSE Accounting teaches do not work like this.

Inventory usually sits untouched through the whole year and is measured only once, at the end. Knowing why shows how cost of sales is put together.

The picture most students expect

The instinctive model is a running tally. Each time goods leave the shelf, the business reduces its inventory by their cost and records that cost as an expense there and then. Cost of sales would be the sum of all those small reductions.

It is a tidy idea, and close to how a modern supermarket’s computer works. But it assumes the business knows the cost of the specific goods in every sale at the moment of the sale. For most businesses that IGCSE describes, that is not so.

The periodic system IGCSE uses

The syllabus uses the periodic inventory system. The business does not adjust its inventory records as goods are sold.

Purchases are recorded in a purchases account as they happen, and sales in a sales account. The inventory itself is left alone during the year.

At the year end, someone counts what remains in the storeroom and values it. That single closing figure is then used to work out how much inventory was sold over the whole period. “Periodic” means the inventory position is found at the end of a period, not continuously.

How cost of sales is built at the year end

The business has not tracked the cost of each sale, so it works out cost of sales by difference. It starts with the inventory held at the start of the year and adds everything purchased during the year.

That gives the total goods available to sell. It then deducts the inventory still unsold at the year end.

What is left must be the cost of the goods that left the business. Opening inventory plus purchases minus closing inventory gives cost of sales.

No sale-by-sale record is needed. Anything bought but no longer on the shelf is taken to have been sold.

Why the count happens once

There is a practical reason. A traditional trader sells many small, similar items, such as tins, screws or lengths of cloth, bought at different times and prices.

Such a trader cannot easily know the exact cost of each sale as it happens. Recording a cost against every sale needs more detail than a small business keeping books by hand can manage.

The periodic system avoids the problem. It does not ask what each sale cost, only what is left at the end. One careful count replaces thousands of small calculations.

What the perpetual system does differently

The alternative is the perpetual inventory system, with records kept continuously up to date. Every purchase adds to the inventory account, and every sale removes the cost of the goods sold at once. The inventory figure is always current and cost of sales builds up through the year.

Barcode scanners and inventory software make this possible. When an item is scanned, the system knows its cost and adjusts both inventory and cost of sales. This gives real-time knowledge of what the business holds, but it relies on technology beyond the small trader IGCSE uses for its examples.

Why the periodic approach suits the businesses studied

The syllabus mostly features sole traders and small partnerships that buy and sell physical goods without a computerised till behind every transaction. For them, the periodic system is a sensible fit.

Their inventory is small enough to count in an afternoon. The year-end figure is trustworthy because it rests on a real stocktake, not on records that may drift from the shelves. It also shows clearly how cost of sales comes from opening inventory, purchases and closing inventory, a relationship the subject wants students to grasp.

Following the figures through a year

A trader begins the year holding RM5,000 of goods and buys a further RM60,000 of inventory during the year. The trader makes many sales, and none of them touches the inventory record at the time. At the year end, a physical count values the unsold goods at RM8,000.

Cost of sales is RM5,000 + RM60,000 - RM8,000 = RM57,000. The business never recorded the cost of one individual sale, yet it reaches a complete and defensible figure.

Change the closing count to RM6,000 and cost of sales rises to RM59,000. The only figure that moved was the year-end count.

What this teaches you to read

Seeing inventory as measured once, not reduced sale by sale, changes how the trading account reads. The purchases figure is not the cost of what was sold. It is the cost of what was bought.

The two differ by the change in inventory across the year. Closing inventory is the hinge that turns everything bought into the cost of only what was sold.

This links to the matching concept too, since holding back the cost of unsold goods keeps this year’s costs against this year’s sales.

Is your child unsure why inventory is not reduced with each sale? One of our teachers can walk through the periodic system with them.

One year-end count produces the whole figure. Book a trial class

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.5 Valuation of inventory (page 15).