Perpetual and Periodic Inventory

Perpetual and Periodic Inventory

While the perpetual system cannot perform the physical inventory count as companies with thousands of inventory transactions widely use it. The perpetual system relies on automation and computer software to update inventory records. Since the inventory account is updated with each transaction, the automation tools become a prerequisite for this system. Let us discuss how perpetual and periodic inventory systems work and how they differ. Below are the journal entries that Rider Inc. (the sporting goods company) makes for its purchase of a bicycle to sell (Model XY-7) if a perpetual inventory system is utilized. A separate subsidiary ledger file (such as shown previously) is also established to record the quantity and cost of the specific items on hand.

• Businesses can simplify the inventory costing process by using a weighted average cost, or the total inventory cost divided by the number of units in inventory.
• When items are sold or purchased for stocks, the staff will update the records.
• Unlike a periodic system, there is no purchases account for the perpetual inventory system.

A periodic inventory system requires counting items at various intervals—i.e., weekly, monthly, quarterly, or annually. Proponents of perpetual inventory systems don’t always go out of their way to point out the downsides of these systems, chief of which includes the lack of accounting for loss, breakage, or theft. On the other hand, detractors don’t necessarily note that reported stockouts without corresponding sales can signal theft or loss and trigger a physical inventory faster than with a periodic 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. It provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, and it accurately reflects the level of goods on hand.

Perpetual inventory system pros and cons

The last in, first out (LIFO) method means you sell your newest purchased or manufactured goods first. The information provided by a perpetual system does not necessarily provide additional benefit. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Once the COGS balance has been established, an adjustment is
made to Merchandise Inventory and COGS, and COGS is closed to
prepare for the next period. When I worked at a restaurant in high school, key items were counted every single night. Once the COGS balance has been established, an adjustment is made to Merchandise Inventory and COGS, and COGS is closed to prepare for the next period.

The perpetual inventory system is an accurate system that does not rely on manual and physical inventory count very often. A periodic inventory system updates and records
the inventory account at certain, scheduled times at the end of an
operating cycle. The update and recognition could occur at the end
of the month, quarter, and year. There is a gap between the sale or
purchase of inventory and when the inventory activity is
recognized. The perpetual inventory system keeps track of inventory balances continuously. This is done through computerized systems using point-of-sale (POS) and enterprise asset management technology that record inventory purchases and sales.

Periodic Inventory

Imagine owning an office supply store and trying to count and record every ballpoint pen in stock. This is why many companies perform a physical count only once a quarter or even once a year. For companies under a periodic system, this means that the inventory account and cost of goods sold figures are not necessarily very fresh or accurate. The cost of goods sold (COGS) is an important accounting metric derived by adding the beginning balance of inventory to the cost of inventory purchases and subtracting the cost of the ending inventory. With a perpetual inventory system, COGS is updated constantly instead of periodically with the alternative physical inventory.

Periodic Inventory Is Better For

Small- and medium-sized companies or companies with small physical inventories continue to use the periodic inventory system, though many are opting for low-cost perpetual inventory systems. Businesses can choose to use either a perpetual period periodic inventory system to calculate their cost of goods sold (COGS). A periodic inventory system calculates the COGS following a physical inventory count at period-end, whereas a perpetual inventory system calculates the COGS after each sale. 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.

System software provides real-time updates to inventory through the use of barcode scanners or other computerized records of product acquisition, sales, and returns as they occur. This information is fed into a continually adjusted perpetual database. While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically. Where we are not keeping perpetual records of our inventories, it is inappropriate to adjust the “inventory” account (since there are no continuous, accurate records of our inventory levels).

Definition of Perpetual Inventory System

This enhanced product allows businesses to connect sales and inventory costs immediately. A business can easily create purchase orders, develop reports for cost of goods sold, manage inventory stock, and update discounts, returns, and allowances. With this application, customers have payment flexibility, and businesses can make present decisions to positively affect growth.

FIFO means that the goods you purchased or manufactured first are the ones you sell first. You will have ongoing, accurate results if you properly manage your perpetual inventory by updating it on a regular basis. Suppose the company makes sales of $ 5,000 that had the cost of goods periodic inventory system: methods and calculations sold at $ 2,000. The company uses inventory data to update its inventory reorder points. Since the data is updated continuously, the company can adjust its purchase orders quickly as well. Any expenses incurred such as insurance and freight are also included in this step.

Comparing Periodic and Perpetual Inventory Systems

These companies often don’t need accounting software to do the counts, which means inventory is counted by hand. As such, the system is commonly used by companies that sell small quantities of inventory, including art and auto dealers. Changes in inventory are accurate (as long as there is no theft or damage to any goods) and can be easily accessed immediately. The information collected digitally is sent to central databases in real-time.