Perpetual Inventory System: Definition, Example, Accounting, vs Periodic Inventory Systems

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Inventory is the primary source of revenue for companies that sell physical goods and products. These companies manufacture or purchase items and sell them to customers. During this process, companies must track the goods available for sale. One of the systems that companies can use to do so is the perpetual inventory system.

What is the Perpetual Inventory System?

The perpetual inventory system is an automatic arrangement used to track inventory. This system involves updating stock levels after every transaction. Therefore, companies must record every sale, purchase, and production that impacts inventory levels. This system is prevalent in stores or companies that use point-of-sales software to handle sales.

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The perpetual inventory system allows companies to update their stock records in real time. Therefore, companies can get a better picture of their inventory. The perpetual inventory system goes against the periodic system, which involves regular stock counts to update records. However, companies still perform these counts in the perpetual system, albeit less frequently.

How does the Perpetual Inventory System work?

Companies must maintain updated records on their inventory. Usually, companies prefer the periodic inventory system that updates these records after regular intervals. However, it may not be practical for every business. The alternative to that system is the perpetual inventory system. In this system, companies record every sale, purchase, and production transaction to update inventory.

The perpetual inventory system demands more work since it requires tracking every inventory transaction. However, an automated system can help simplify this process. As stated above, a perpetual inventory system does not require frequent stock counts. However, they are still necessary to ensure the inventory records match the actual number of physical goods.

What are the advantages and disadvantages of a Perpetual Inventory System?

The perpetual inventory system has several advantages, some of which are below.

  • It allows companies to update and manage inventory in real time.
  • It helps identify products or inventory that are closing out-of-stock levels.
  • It can help identify instances of fraud or theft in inventory.
  • It can reduce the costs associated with regular stock counts.
  • It provides a more accurate record of inventory that enters the financial statements.

However, it also comes with some disadvantages, as listed below.

  • It is more susceptible to errors which can lead to inaccurate records.
  • It relies heavily on automated systems.
  • It may be slower in identifying theft since stock counts occur less frequently.
  • It may create a divergence in the inventory recorded in the system and the actual available stock.

What is the difference between Perpetual and Periodic Inventory Systems?

The primary difference between perpetual and periodic inventory systems is the timing. As stated above, the former system updates record in real-time. Consequently, these records reflect the most up-to-date information about the stock. On the other hand, the periodic inventory system updates these records after regular intervals. Therefore, the stock information may not be as up-to-date at all times.

The perpetual inventory system relies on automated systems. On the other hand, the periodic system requires physical stock counts. Usually, these counts occur after regular intervals. However, some companies perform these yearly or quarterly to update their financial statements. Both systems can result in different figures in those statements for the cost of sales and inventory.

Conclusion

Maintaining stock records is crucial to running a business. Usually, companies use two systems to achieve that, including perpetual and periodic inventory systems. The perpetual inventory system involves updating inventory records after every transaction. This system can have some advantages and disadvantages, as listed above.

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