This can lead to discrepancies between actual and recorded inventories due to theft, damage, or errors. 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. These audits include regular physical inventory counts on a scheduled and periodic basis. The major difference between perpetual and periodic inventory systems is that the former has a system that updates inventory information in real time, while the latter uses a more manual process.
Perpetual Inventory System vs. Periodic Inventory System: What’s the Difference?
Also, it means that a business can reliably promise firm delivery dates to its customers, which enhances customer satisfaction and may even increase sales. This is done through computerized systems using point-of-sale (POS) and enterprise asset management technology that record inventory purchases and sales. 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.
Pros and Cons of Using a Perpetual Inventory 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. The FIFO method offers several benefits, such as minimizing spoilage and obsolescence. This comes as a result of older stock being prioritized before becoming outdated.
Perpetual systems also keep accurate records about the cost of goods sold (COGS) and purchases. The calculated inventory levels derived by a perpetual inventory system may gradually diverge from actual inventory levels, due to unrecorded transactions or theft. Therefore, you should periodically compare book balances to actual on-hand quantities (typically using cycle counting) and adjust the book balances as necessary. 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. A perpetual inventory system allows for quick identification and resolution of issues such as stock discrepancies or data entry errors.
Like FIFO, a perpetual inventory system makes the tracking of an item’s acquisition date an easier feat, allowing the company to adhere to the standards and guidelines of the LIFO method. This method is more common in industries that are often subject to inflation, with some of the benefits and disadvantages centering on this aspect. In times of rising prices, the LIFO method can result in lower taxable income and, consequentially, reduced tax liability for businesses. Companies can choose among several methods to account for the cost of inventory held for sale, but the total inventory cost expensed is the same using any method.
- Most small and medium-sized companies use the periodic inventory system, which involves scheduled inventory audits throughout every year.
- This method tends to provide more accurate results when dealing with perishable goods or products with short shelf lives since they need to be sold before their expiration dates.
- Products are barcoded, and point-of-sale (POS) technology tracks these products from shelf to sale.
- All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Why Do Companies Use Perpetual Inventory System?
This is because the computer software that companies use makes it a hands-off process that requires little to no effort. Products are barcoded, and point-of-sale (POS) technology tracks these products from shelf to sale. These barcodes give companies all the information they need about specific products, including how long they sat on shelves before they were types of financial analysis purchased.
Perpetual vs. periodic inventory
Any manual entry greatly increases the risk of data entry errors, which reduces the accuracy of the inventory records. For example, a retail store may sell thousands of items per day, each of which must be recorded as a reduction in the on-hand quantity. Without bar code labels or RFID tags, it is quite likely that these sales would be charged to the wrong units, or in the wrong quantities, or not recorded at all. The perpetual inventory system involves tracking and updating inventory records after every transaction of goods received or sold through the use of technology.
To simplify the illustration, all items are assumed to have had the same cost, $2.00. Also, as already noted, some perpetual records maintain only a record of units. Every parcel that is delivered is first scanned, after which the balance is added to the current inventory levels. 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. This method tends to provide more accurate results when dealing with perishable goods or products with short shelf lives since they need to be sold before their expiration dates.
It can be cumbersome and time-consuming, as it requires you to manually count and record your inventory. It also isn’t as up to date as a perpetual system, as it is done at periodic intervals rather than continuously. Under the perpetual system, managers are able to make the appropriate timing of purchases with a clear knowledge of the number of goods on hand at various locations. Having more accurate tracking of inventory levels also provides a better way of monitoring problems such as theft. 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 COGS figures are not necessarily very fresh or accurate.
The proper maintenance of a perpetual inventory system requires that a large number of transactions be recorded in real time. To do so accounting software with minimal errors, each inventory item should be tagged with a bar code or an RFID tag. These tags are used as the basis for a transaction every time an unit is received from a customer, moved within the company, or sold.
A perpetual inventory system can utilize the FIFO (First-In, First-Out) or LIFO (Last-In, First-Out) method. The selection of FIFO or LIFO will depend on the particular needs and desires of the company. FIFO is more commonly used as it reflects a natural flow of goods in most industries where older items are sold before newer ones. Periodically compare your accounting books to on-hand inventory to ensure your inventory balances are correct.
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.
A periodic inventory system requires counting items at various intervals, such as weekly, monthly, quarterly, or annually. In a perpetual inventory system, COGS is calculated automatically after each sale by multiplying the number of units sold by their respective costs per unit (source). Conversely, in a periodic inventory system, COGS is determined manually at specific intervals using beginning and ending inventories along with purchases made during that period. Throughout this guide, you’ll learn about the key differences between a perpetual system and periodic inventory systems. We’ll also discuss the pros and cons of using a perpetual inventory system in various scenarios. This data will be useful when installing such a system inside your business.Read on for further information about perpetual inventory systems and how they can help you better manage your business.
