Given that it accounts for 80% of the cost of the final product, the material is a crucial component of the production cost. Thus, through the inventory record system, every manufacturing company keeps track of the inventory it purchases, returns, and issues throughout the year. There are two types of inventory systems: perpetual inventory systems, which continuously record stock movement, and periodic inventory systems, which periodically update the inventory records only following a physical stock count.
Periodic vs Perpetual Inventory Accounting
What is perpetual inventory?
For perpetual inventory, software manages the available stock. Through the point-of-sale computer system, adjustments are recorded following each transaction. Each inventory item’s purchase, cost of goods sold, and quantity in stock are recorded separately in a separate ledger.
Each item is given a barcode or serial number to help identify its provenance and the purchase order it came from. The barcodes also assist in determining the item’s shelf life and current location.
What is periodic inventory?
Weekly, monthly, or quarterly updates to inventory records are made using the periodic inventory technique. You physically count your company’s inventory at the end of each period to determine how much is available for sale. Once all items have been counted, the inventory account is transferred from the purchase account, where all purchases are initially recorded. After that, you can use this balance to start a new period.
Periodic vs. perpetual inventory: What are the benefits and detriments of each?
Some of the benefits of the periodic inventory system include:
Detriments of periodic inventory include:
Here are some advantages of perpetual inventory systems in comparison:
Detriments of perpetual inventory include:
What’s the difference between periodic vs. perpetual inventory?
Although a company’s inventory is managed using both periodic and perpetual inventory systems, the two differ noticeably in the frequency of use. Other differences between periodic and perpetual inventory include:
How can you choose the right inventory system for your company?
It’s crucial to choose an inventory management system that perfectly suits your company’s needs if you want to manage your company’s inventory. Given that there are fewer products to count when working for a smaller company, you might want to think about using a periodic inventory system. You can do this to save money that would be better spent somewhere else.
A perpetual inventory system, in contrast, is the best option for larger businesses that must manage large quantities of numerous different products at once. This could aid in gathering more precise data and making it simpler to identify inventory errors.
Determine whether inventory plays a significant role in your industry as another factor. For instance, you might not require a sophisticated inventory management system if you sell more services than products. If your business sold more than just products, you might find it easier to count the inventory you do have.
FAQ
What is the major difference between a periodic and perpetual?
The perpetual inventory system maintains a continuous record of inventory transactions, whereas the periodic system only records these transactions at the end of the period. This is the main distinction between the periodic and perpetual inventory systems.
What is the difference between periodic and perpetual LIFO?
The latest costs are presumed to be removed from inventory at the end of the accounting year with periodic LIFO. When using perpetual LIFO, the most recent costs are subtracted from inventory before each sale.
Do most companies use perpetual or periodic?
Due to the high volume of inventory transactions and the computerized nature of the rest of their financial and accounting systems, large businesses typically use perpetual inventory systems rather than periodic inventory systems.
