Perpetual Inventory Systems Defined (With Examples)

A perpetual inventory system is a program that continuously estimates your inventory based on your electronic records, not a physical inventory. This system starts with the baseline from a physical count and updates based on purchases made in and shipments made out.
  1. Step 1: Point-of-sale system updates inventory levels. …
  2. Step 2: Cost of goods sold is updated automatically. …
  3. Step 3: Reorder points are adjusted frequently. …
  4. Step 4: Purchase orders are automatically generated. …
  5. Step 5: Received products are scanned into inventory.

Inventory Systems: Perpetual vs Periodic

Benefits of using a perpetual inventory system

Many experts believe perpetual inventory, which calculates inventory continuously at the point of sale, is superior to periodic physical inventory because it can give a real-time overview of ordering requirements whenever necessary. In comparison to a system that necessitates regular physical inventory counts, it also requires less labor.

Because perpetual inventory systems typically integrate with other accounting processes like budgeting and purchasing, they make it simpler to navigate the complexities of business decisions. Due to the thoroughness of their records, perpetual inventory systems also simplify the process of identifying differences between a point of sale system and a physical inventory count.

What is a perpetual inventory system?

One way to monitor the flow of goods and services at the point of sale is with a perpetual inventory system. To calculate sales of specific items and compare those sales to the company’s anticipated overall product base, these systems typically rely on point-of-sale software. In a perpetual inventory system, you can almost always run a report to get an approximate idea of how much inventory is on hand at any given time.

To ensure accuracy and reconcile their records, businesses will occasionally physically count their inventory and compare it to this system. Some companies do this on a regular basis to aid in the tracking of losses like shrink and theft.

Perpetual inventory vs. periodic inventory

Periodic inventory and perpetual inventory are two distinct systems that, in the end, produce somewhat different accounting results. Here are some differences between these two systems :

How to switch to a perpetual inventory system

Here are some actions you can take to start using a perpetual inventory system in your company:

1. Identify your needs

The needs of the business should be taken into account before switching to a perpetual inventory system. Consider using a system that will seamlessly integrate with your current systems if you already have intricate accounting procedures in place. Consider the quantity of inventory you sell and the scope of the inventory software product you’ll likely want to use if you don’t have a defined accounting process in place. When evaluating your needs for perpetual inventory software, you may also want to consider how frequently you want to or are required to complete physical inventories.

2. Choose a software system

Start choosing a software system by investigating the various programs that are offered. Consider the specifications of any particular point-of-sale hardware you may have, such as cash registers or computer terminals, if you have access to them. You can start your search in a useful way by conducting a web search for the terms “perpetual inventory system software” or “inventory management software.”

3. Migrate your inventory

You can add your inventory and start using the perpetual inventory system software once you’ve decided on it. Many software vendors provide training courses to help customers start using their products. Some even offer on-site integration support. If there are opportunities for this kind of onboarding, think about using them.

Additionally, you might want to write down your experiences for later reflection. For instance, you might make a note to return to a particular workflow element for additional training if it seems complicated.

Examples of when to use a perpetual inventory system

You might be unsure of the value of implementing a perpetual inventory system in your own company. Here are a few scenarios in which a company might decide to switch to perpetual inventory:

Growing to scale

Because periodic inventory has become too physically taxing for a business that is expanding quickly, they may decide to use a perpetual inventory system. For instance, if you run a bookstore and your sales have suddenly doubled, you may decide to switch to a perpetual inventory system to reduce the labor costs associated with physical inventories. In this case, a perpetual inventory system would also make it possible for you to efficiently manage inventory across numerous locations.

Accessing new technology

If new hardware or technology becomes accessible, that’s a great opportunity to start using a perpetual inventory system. For instance, if you run a bakery and have recently upgraded your register terminals from old, out-of-date hardware, you might also decide to incorporate a perpetual inventory system at the same time. Upgrades can be a good opportunity to switch to perpetual inventory if hardware restrictions have prevented its use.

Employee training or turnover

You might also have a good opportunity to switch to a perpetual inventory system if you have significant employee training planned or are hiring new hires that will necessitate group onboarding. For instance, before the season starts, you might decide to switch to a perpetual inventory system if you run a seasonal raft gear store. In this manner, you can incorporate the new software into your seasonal employees’ regularly scheduled training sessions when they show up for training.

FAQ

What is difference between perpetual and periodic inventory system?

Your inventory balances are continuously monitored by a perpetual inventory system. Updates are automatically made when you receive or sell inventory. Purchases and returns are immediately recorded in your inventory accounts. A grocery store might employ a perpetual inventory system, for instance.

How do I calculate perpetual inventory?

Merchandise Inventory and Cost of Goods Sold are particularly impacted by a perpetual inventory system inventory’s constant updates to purchase and sales records. A periodic inventory system does not continuously track updates to inventory and sales costs; rather, it does so at predetermined intervals throughout the year.

Who uses perpetual inventory system?

Key Takeaways Businesses need perpetual inventory systems if they have large inventories, high sales volumes, and numerous retail locations.

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