Perpetual vs Periodic Inventory: What’s the Difference?

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. Under a perpetual inventory system, updates are made continuously – every time a product is sold, bought or manufactured. The same goes for returns; the inventory count will be immediately updated upon their arrival.

The decision as to whether to utilize a perpetual or periodic system is based on the added cost of the perpetual system and the difference in the information generated for use by company officials. The company’s inventory is not physically affected by the method selected. When new inventory is purchased, it goes directly into the inventory account, and there is no closing entry. Cost of goods sold is increased, https://business-accounting.net/ and inventory is decreased the instant that inventory is sold. Companies calculate the cost of ending inventory by using theLIFO or FIFO inventory accounting methods, or other less common methods. Beginning inventory simply equals the ending inventory from the previous time period. Calculate the beginning inventory as whatever stock remains from the previous period if you do not have a true beginning inventory.

Purchases involved in  Periodic and Perpetual

You will wonder how you ever managed your operations without SOS Inventory. It is so much easier to implement than larger, bloated systems that can take a full year to implement, causing chaos in your business in the meantime. SOS Inventory is the affordable option for SMEs who want accurate inventory and reporting at any time. It means that the last costs of available sales are the first ones to be removed from the system’s inventory account. “Dollar stores,” which have become particularly prevalent in recent years, sell large quantities of low-priced merchandise. Goods tend to be added to a store’s inventory as they become available rather than based on any type of managed inventory strategy. Again, officials must decide whether keeping up with the inventory on hand will impact their decision making.

Inventory tracking is no joke, but there are various inventory valuation methods to help, but again, it’s impossible to choose a better one with long-term outcomes. Now that brings us to the perpetual inventory system and periodic inventory system, which are two standard methods for tracking the available products. In this blog, we are sharing the difference between periodic and perpetual inventory systems, periodic vs perpetual inventory, along with their pros and cons so that you can make a suitable choice. 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.

COGS Formula

Perpetual inventory methods are increasingly being used in warehouses and the retail industry. With perpetual inventory, overstatements, also called phantom inventory, and missing inventory understatements can be kept to a minimum. Perpetual inventory is also a requirement for companies that use a material requirement planning system for production.

• Overall, perpetual systems are more suited to companies that have high sales volume or multiple retail locations because it is a timelier system.
• It is actually a software system that can support taking the count of inventory at specific periods.
• If the product is new, the employee must add the details of the product when they initially scan it.
• Again, officials must decide whether keeping up with the inventory on hand will impact their decision making.

Consequently, even with a perpetual system, the inventory records must be reconciled occasionally with the items actually present to reestablish accuracy. Properly managing inventory can make or break a business, and having insight into your stock through the perpetual inventory method is crucial to success. Regardless lifo perpetual vs periodic of the type of inventory control process you choose, decision-makers know they need the right tools in place so they can manage their inventory effectively. NetSuite offers a suite of native tools for tracking inventory in multiple locations, determining reorder points and managing safety stock and cycle counts.

More in ‘Accounting’

He most recently spent two years as the accountant at a commercial roofing company utilizing QuickBooks Desktop to compile financials, job cost, and run payroll. During the physical count, FitTees found that there are 225 units of designer shirts and 354 units of jeans on hand. All inventory purchases are recorded in the Purchases account, which is shown in the COGS section of the income statement.

In a periodic system, these investigations are more complicated, because the system aggregates data at a high level. It is difficult to use this data to pinpoint errors in the process. Calculate ending inventory and cost of goods sold under both a periodic and a perpetual FIFO system.

Q: Why would someone choose not to use a perpetual inventory control system?

Also called the moving average cost method, accountants perform this differently in a perpetual system as compared to a periodic system. The periodic and perpetual inventory systems require different journal entries. Let’s first go over the periodic method journal entries then segue into the perpetual inventory system afterward. In our illustration, let’s use sample data from a fictitious company called FitTees. When using the perpetual inventory system, the general ledger account Inventory is constantly changing. For example, when a retailer purchases merchandise, the retailer debits its Inventory account for the cost.