Perpetual Inventory System vs Periodic Inventory System: Whats the Difference?

Perpetual inventory is computerized, using point-of-sale and enterprise asset management systems, while periodic inventory involves a physical count at various periods of time. The latter is more cost-efficient, while the former takes more time and money to execute. In this case, book inventory would be exactly the same as, or almost the same, as the real inventory.

A perpetual inventory system is a computerized system that continuously records inventory changes in real-time, thereby reducing or eliminating the need for physical inventory checks. Relying on data provided by electronic point-of-sale technology, it provides a highly detailed view of changes in inventory and immediate reporting on the amount of inventory in stock. Perpetual inventory systems differ from periodic inventory systems, in which a company must instead depend on regularly scheduled physical counts. The perpetual inventory system is a more robust system than the periodic inventory system, which is where a company undertakes regular audits of stock to update inventory information.

What’s the Difference Between FIFO and LIFO?

Inventory refers to any raw materials and finished goods that companies have on hand for production purposes or that are sold on the market to consumers. Both are accounting methods that businesses use to track the number of products they have available. Like all inventory management systems, inventory forecasting is a crucial aspect, as it informs accurate future business inventory needs. Let us delve further into the importance of inventory forecasting within a perpetual inventory management system. First-In-First-Out (FIFO) dictates that the first inventory items that reach the warehouse should be the first that are sold to or by the retailer. When applied to the context of a perpetual inventory method, tracking of individual items’ acquisition date and cost becomes far more manageable.

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Under perpetual inventory system, the expenses that are incurred to obtain merchandise inventory are added to the cost of merchandise available for sale. These expenses are, therefore, also debited to inventory account under this system. The general examples of such expenses include freight-in and insurances expense etc. Each time the merchandise is sold, the related cost is transferred from inventory account to cost of goods sold account by debiting cost of goods sold and crediting inventory account. The perpetual inventory system is generally more effective than the periodic inventory system. This is because the computer software that companies use makes it a hands-off process that requires little to no effort.

Businesses that use POS systems and sell high-value items (e.g., car dealerships) usually use perpetual inventory systems to frequently count inventory. The periodic inventory system is often used by smaller businesses that have easy-to-manage inventory and may not have a lot of money or the opportunity to implement computerized systems into their workflow. As such, they use occasional physical counts to measure their inventory and the cost of goods sold (COGS). There are times when businesses using the perpetual inventory system may still choose to conduct a physical inventory count at the end of the year.

Perpetual systems are costly to implement but less expensive and time-consuming over the long haul. The choice of the periodic or the perpetual inventory system depends on the nature of the business and the sophistication of the organization. Ideally, businesses that are larger and deal with high-value products may rely on perpetual inventory system that requires much more record keeping and is the more sophisticated of the two systems. Businesses that use the perpetual inventory system employ cycle counting to maintain the accuracy of records. This process counts a portion of the inventory every day and compares free balance sheet templates the quantity against inventory records. Here, the transactions are checked in bulk, like in periodic systems; there is also no need for physical counting unless there are doubts regarding breakage or theft.

Chicken’s voting for bad forecasting and inventory management

It may make sense to use the periodic system if you have a small business with an easy-to-manage inventory. If you have a larger company with more complex inventory levels, you may want to consider implementing a perpetual system. The software you introduce into the workflow will make it easier for you to update and maintain your inventory.

The return of goods from customers to seller also involves two journal entries – one to record the sales returns and allowances and one to reverse the transfer of cost from inventory to COGS account. Both merchandising and manufacturing companies can benefit from perpetual inventory system. If your business revolves around continuous inventory management, using the perpetual inventory method offers a lot of advantages. Some pros of perpetual inventory include its ability to provide up-to-date inventory information instantly, its easy access system, and how it reduces the requirement to count physical inventory. Each time a product is scanned and purchased, the system updates the inventory levels in a database.

1. The perpetual inventory system records the sale value of inventory whereas the periodic inventory system records cost of goods sold.
2. At a grocery store using the perpetual inventory system, when products with barcodes are swiped and paid for, the system automatically updates inventory levels in a database.
3. Similarly, every package that is dispatched is scanned by barcode and loaded onto a vehicle.

Periodic inventory systems only track sales when a physical count is ordered and require income taxes payable on balance sheet a point-in-time count. The perpetual inventory system records the sale value of inventory whereas the periodic inventory system records cost of goods sold. In perpetual inventory system, purchases are directly debited to inventory account while purchase returns are directly credited to inventory account. A perpetual inventory system keeps continual track of your inventory balances. Purchases and returns are immediately recorded in your inventory accounts. Businesses have a variety of options for tracking inventory, including the periodic inventory method, perpetual inventory method, or a mixture of both methods.

Instead, prior to the widespread use of computers, the Internet, and other digital technologies, it was common for a company to use a periodic inventory system. When deciding how to maintain control over physical inventory, it’s prudent to carefully weigh both the pros and cons of any system under consideration. Like many things in business, perpetual inventory has its advantages and disadvantages. The average cost method is your total inventory cost divided by the number of goods in your inventory. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site.

Management of Inventory

The balance in inventory account at the end of an accounting period shows the cost of inventory in hand. The accuracy of this balance is periodically assured by a physical count – usually once a year. If a difference is found between the balance in inventory account and the physical count, it is corrected by making a suitable journal entry (illustrated by journal entry number 6 given below). The common reasons of such difference include inaccurate record keeping, normal shrinkage, and shoplifting etc. Perpetual inventory system is a technique of maintaining inventory records that provides a running balance of cost of goods available for sale and cost of goods sold for a period. Under this system, no purchases account is maintained because inventory account is directly debited with each purchase of merchandise.

Is It Necessary to Take a Physical Inventory When Using the Perpetual Inventory System?

Employees can use perpetual inventory data to provide more accurate customer service regarding the availability of products, replacement parts, and other physical components. These are only required in periodic inventory system to update inventory and cost of goods sold while the perpetual inventory system does not require closing entries for inventory account. Perpetual inventory is an accounting method that records the sale or purchase of inventory through a computerized point-of-sale (POS) system. The perpetual method allows you to regularly update your inventory records to help prevent situations like running out of stock. There are key differences between perpetual inventory systems and periodic inventory systems. For businesses in which transactions such as purchasing, selling, and moving inventory happen every second, perpetual inventory systems are invaluable in helping to keep track of what is going on at all times.