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 professionals consider perpetual inventory, where inventory is calculated constantly at the point of sale, to be better than periodic physical inventory because it can provide a real-time overview of ordering needs at any time. It is also less labor intensive than a system that requires frequent physical inventory counts.

Perpetual inventory systems are usually integrated with other accounting functions, such as budgeting and purchasing, making complex business decisions easier to navigate. Perpetual inventory systems also streamline the process of explaining discrepancies between a point of sale system and a physical inventory count due to the detailed nature of their records.

What is a perpetual inventory system?

A perpetual inventory system is a way of tracking the flow of goods and services at the point of sale. These systems ordinarily rely on point-of-sale software to tabulate sales of particular items and compare those sales to the companys expected overall product base. At almost any time, you can run a report in a perpetual inventory system that gives a relatively accurate idea of how much inventory is in stock at that moment.

Sometimes a business will take a physical count of their inventory and compare it to this system to ensure accuracy and reconcile their records. Some businesses make a regular practice of doing so to help track losses such as shrink and theft.

Perpetual inventory vs. periodic inventory

Perpetual inventory and periodic inventory are different systems that ultimately accomplish somewhat different accounting outcomes. Here are some differences between these two systems :

How to switch to a perpetual inventory system

If you want to use a perpetual inventory system in your business, here are some steps you can follow to begin:

1. Identify your needs

The first thing to consider when switching to a perpetual inventory system is the needs of the business. If you already have complex accounting measures in place, consider using a system that will integrate easily with your existing systems. If you dont have a definite accounting process in place, think about the volume of inventory you sell and the scope of the inventory software product youll likely want to use. You might also want to think about how often you want to or must complete physical inventory when assessing your perpetual inventory software needs.

2. Choose a software system

Begin selecting a software system by researching the kinds of programs that are available. If you have specific kinds of point-of-sale hardware available to you, such as computer terminals or cash registers, take the specifications of those devices into account as well. A web search for the terms “perpetual inventory system software” or “inventory management software” can get your search started productively.

3. Migrate your inventory

When you have selected your perpetual inventory system software, you can add your inventory and begin using it in your daily operations. Many software companies offer training sessions to get started with their products. Some even offer on-site integration support. Consider taking advantage of these kinds of onboarding opportunities if they are available.

You might also want to document your experiences to reflect on later. For example, if a specific workflow appears complex, you might make a note to return to that element for additional training.

Examples of when to use a perpetual inventory system

You might wonder whether using a perpetual inventory system in your own business will be beneficial. Here are some examples of times when a business might want to switch to perpetual inventory:

Growing to scale

A business that is rapidly growing might choose to use a perpetual inventory system because periodic inventory has become too physically cumbersome. For example, if you own a bookshop, you have suddenly doubled your sales and you opened a second location, you might choose to switch to a perpetual inventory system to save on the cost of labor associated with physical inventories. In this example, a perpetual inventory system would also allow you to manage inventory in multiple locations in a streamlined way.

Accessing new technology

Another good time to begin using a perpetual inventory system is if new technology or hardware becomes available. For instance, if you own a bakery, you have been using outdated hardware for years and you have now purchased new register terminals, you might also choose to integrate a perpetual inventory system at the same time. If hardware limitations have prevented the use of perpetual inventory, upgrades can be a good opportunity to make the switch.

Employee training or turnover

If you have a significant employee training scheduled or are hiring new employees that will result in group onboarding, you might also have a good opportunity to switch to a perpetual inventory system. For example, if you run a seasonal raft gear outlet, you might choose to switch to a perpetual inventory system before the season begins. That way, when your seasonal employees arrive for training, you can integrate the new software into their regularly scheduled training sessions.

FAQ

What is difference between perpetual and periodic inventory system?

A perpetual inventory system keeps continual track of your inventory balances. Updates are automatically made when you receive or sell inventory. Purchases and returns are immediately recorded in your inventory accounts. For example, a grocery store may use a perpetual inventory system.

How do I calculate perpetual inventory?

A perpetual inventory system inventory updates purchase and sales records constantly, particularly impacting Merchandise Inventory and Cost of Goods Sold. A periodic inventory system only records updates to inventory and costs of sales at scheduled times throughout the year, not constantly.

Who uses perpetual inventory system?

Key Takeaways

Businesses with larger inventories, high sales volumes, and multiple retail outlets need perpetual inventory systems.

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