Perpetual Inventory System

What is a Perpetual Inventory System in Accounting?

Perpetual Inventory System in accounting means maintenance of real-time purchase and sale of inventory using an automated computerized system and readily calculates Cost of Goods SoldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more (COGS) for a manufacturing concern, which ultimately eliminates the need to maintain age-old periodic inventory records through physical verification of stock on a periodic basis.

Components

perpetual Inventory System

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Source: Perpetual Inventory System (wallstreetmojo.com)

Example of the Perpetual Inventory System in Accounting

PurchasesSales
That includes the generation of MRN/GRN for the purchase of raw materials and consumables and the purchase return process.That includes sales of the finished products and the sales return process.
ProductionOrdering 
That includes the production of finished goods and quality control checks in the material issues.That includes ordering the raw material again post sales of finished goods ad the cycle goes on and on.

Perpetual Inventory System vs. Periodic Inventory System

Perpetual Inventory SystemPeriodic Inventory System
Inventory checks are carried out regularly through automated Point of sales and inventory movement software on a real-time basis.Inventory checks are carried out less frequently and generally done on monthly, quarterly, half-yearly, and annual rests.
Gives accurate and updated information regarding inventory in hand and Cost of goods sold & cost of production;Doesn’t gives accurate and updated information regarding inventory in hand and Cost of goods sold & cost of production;
Provides management and stakeholders with updated stats on the state of the company’s inventory movement on a timely basis so that budgets and forecasts are updated regularly.Doesn’t provides management and stakeholders with updated stats on the state of the company’s inventory movement on a timely basis as the records are updated on a periodic basis either on a monthly, quarterly, or half-yearly basis because of which budgets and forecast are not updated regularly.

Advantages

Disadvantages

Though keeping track of all goods can be expensive and cumbersome, but there is cheap and dependable software available in the market to cater to these problems.

Conclusion

Perpetual inventory system provides the management with up to date status of inventory movement, situation, and cost of goods sold and cost of production on a real-time basis, which was not possible in a periodic inventory systemPeriodic Inventory SystemPeriodic Inventory System is a method of inventory valuation in which inventories are physically counted at the end of a specific period to determine the cost of goods sold.read more. However, this might be expensive and time-consuming. Also, the calculation of inventory in a perpetual inventory system might sometimes diverge from actual inventory levels due to unrecorded transactions and thefts, so the organization should periodically compare book balance to actual stock in hand quantities and adjust the book balances as necessary.

Regardless of anything, the perpetual inventory system is always considered as a preferred method of inventory calculation and maintenance because it always produces accurate and up to date inventory information on a regular and real-time basis as needed by the management of an organization. Perpetual stocking system works best with automated and computerized tools which are updated in real-time by the production floor staff using bar code scanners or by sales/production clerks using point of salePoint Of SaleFull form of POS or point of sale can be defined as a final step in the completion of purchase where the customers pay for the goods or services that they are willing to buy at a retail store. It is an arrangement in a store where the sale of goods or services takes place which includes processing of orders, payment of bills, and check out too.read more terminals. It is least workable when changes/movements in stock are recorded on manual inventory cards since there is a high chance that entries will not be made correctly or in a timely and efficient manner.

This has been a guide to what is the perpetual inventory system and its definition. Here we discuss types and examples of perpetual inventory along with advantages and disadvantages. You can learn more about accounting from the following articles –

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