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 Sold (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
- Bin Cards – Bin card records the status of the movement of goods stored on the inventory storage floor. A typical business with a large storage room will use a bin card to record a running movement of the stock in hand and obsolescence of that inventory.
- Stores Ledger – A store ledger is a manual or automated record of the raw materials and consumables stored in a production floor, which tracks the current quantity of items in hand.
- Continuous Stock Taking – Continuous stocktaking means inventory physical verification counts that are undertaken on a regular basis by the entity or the external/internal auditors.
Example of the Perpetual Inventory System in Accounting
Perpetual Inventory System vs. Periodic Inventory System
| Perpetual Inventory System | Periodic 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
- During the physical verification of stock internally or externally, there is no need to stop the production of goods over the production floor.
- The stock of goods, the cost of goods sold, and the cost of production is always available readily.
- It helps in maintaining the economic order quantity; there is no need for additional working capital investment/blockage.
- It helps in the timely detection of thefts, losses, pilferage, and wastage of goods so that timely corrective action can be taken by the management.
- Since the amount and quantity of all kinds of stock are readily available, the preparation of financial statements is not delayed, and the inventory records are always readily available for both external and internal verification.
- This method helps in bringing proper controls over stores and is the complete and dependable method of inventory system.
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.
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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 system. 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 sale 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.
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