Perpetual Inventory System

Updated on May 6, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Perpetual Inventory System?

The perpetual inventory system is a computerized record-keeping arrangement for continual inventory evaluation in real-time. It utilizes the program to monitor, follow the rules immediately, and upgrade the system. Moreover, the perpetual inventory system example incorporates barcode scanners to register transactions as they occur and maintain their journal entry.

What Is Perpetual Inventory System

The real-time inventory information certainly helps the merchant handle predictions, offer precise shipment instructions, and provide superior customer service. Furthermore, periodic and perpetual inventory system are two contrasting methods following real-time and manual stockpile management processes, respectively.

Key Takeaways

  • The perpetual inventory system meaning demonstrates an automated inventory management procedure for stockpile assessment in real-time.
  • It aids in live monitoring and system upgrading to provide accurate shipping particulars and exceptional customer service. For example, using barcode scanners to record each transaction.
  • The benefits of perpetual inventory constitute decreased management costs, real-time inventory handling, detailed reporting, and accurate demand forecasting.
  • Periodic and perpetual inventory system follow different approaches to cataloging. While the former conducts real-time monitoring, the latter manually regulates the process.

Perpetual Inventory System Explained

A perpetual inventory system permits real-time updating of the physical inventory and so, workers save these details in a frequently modified directory to trace each change. In addition, it tracks the merchandise by updating the product catalog upon each transaction. That is to say, it is a more pragmatic and capable inventory management choice for numerous corporations.

Please note that the inventory management system derives its value from the coordination capacity with other industries. For instance, its unification with the fiscal system ensures correct tax reporting. Also, the integration with the marketing system aids in comprehending consumer behavior.

Large companies with huge inventory amounts or small and medium enterprises looking for expandability maintain the perpetual system. That is to say, it is useful to understand profitability and margins.

Whenever the enterprise sells or purchases the latest inventory, the software registers the prices charged and any modifications within the sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account.read more account. It certainly confirms that accounting documents display specific balances in the affected accounts. Furthermore, the market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more, purchase price, and accounts affected are crucial elements of the perpetual inventory system journal entry.

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Examples

To clarify, let’s examine a few examples here.

Example#1

Suppose that Miranda owns a multi-national furnishing company that regularly sells hundreds of goods. Needlessly, she must maintain an appropriate account of what, when, and how much of it is coming in and going out of the company. The usage of 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 will certainly cost her a lot of time and additional expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more.

Rather, she utilizes the perpetual inventory management system, which tracks each transaction in real-time. It means that:

  1. Firstly, an online inventory database is designed.
  2. All received inventory is then instantly added to the current database through barcode scanners.
  3. By default, all merchandise sold is eliminated to compute the 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) immediately.
  4. Previous and current inventory statistics are available on your computer.

Example#2

The market leader in direct store delivery for wholesale supply chainSupply ChainA supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale.read more, ReposiTrak, is now providing an omnichannel perpetual inventory management system. Moreover, the decision is taken to ensure the offline availability of digitally selected products.

The DSD perpetual system also guarantees the accessibility of basic necessities like milk and bread. Moreover, it expands ReposiTrak’s overall DSD track record, incorporating almost 60 million store stock-keeping unit counts. As a result, its clientele is witnessing boosted sales, usually surpassing 50%, since both consumers and retailers can obtain the product online and offline.

Perpetual Inventory System Advantages

To clarify, here are a few benefits of the perpetual system:

Real-time Inventory Management

The perpetual inventory system meaning signifies the immediate reporting of stockpile developments as well as updates. Hence, the inventory counts are always error-free. Moreover, external auditorsExternal AuditorsExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more get financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more like an inventory checklist with related unit quantities and placements for the stock-takingStock-takingStock taking is the process of physically counting stock items and verifying them to the company's electronic records. It is usually done at the end of the year as part of the annual audit and in the presence of external auditors.read more procedure.

Money-saving

Owing to the perpetual inventory, companies are not required to shut the establishments for physical inspection. Additionally, details from scanned barcodes assist in estimating economic order quantityEconomic Order QuantityEconomic Order Quantity (EOQ) is a formula that calculates the optimal volume of production or order that an enterprise should add in order to minimize order expenses or holding costs. The holding cost, ordering cost, annual holding cost, and total cost are all important components of an EOQ.read more and stock forecasting. This certainly aids businesses in accounting for all dealings to offer absolute liability for the items.

Perfect Demand Estimation

It undoubtedly aids you in predicting subsequent sales cycles to guarantee precise inventory availability throughout different seasons, like public holidays. In addition, it helps determine the reorder pointReorder PointReorder point refers to that stage of inventory management in which the inventory needs to be reordered to ensure the timely availability of goods for sales. It ensures that a business can have a minimum product quantity in storage to prevent operational disruptions arising out of a stockout. At the same time, the reorder point will stop holding stock beyond the safety point to avoid unnecessary storage costs.read more and thus, avoids the problems associated with overstocking. Moreover, utilizing Point of salesPoint Of SalesPoint of sale (POS) refers to the payment counter in a retail store where customers pay for their purchased goods. For example, the counter at McDonald’s where you place an order and pay for it is an example of a POS. The desktop on which the staff keys in your order and payment details is a part of the POS terminal.read more terminals aids in the precise calculation of when, what, and how much to stock.

Comprehensive Documentation

Please note that the perpetual system comprises records for all transactions entailing inventory. Consequently, it becomes effortless to discover filling mistakes. This not only helps sustain total management but also aids in directing transaction inquiries to facilitate instruction and operations. Moreover, it soars the accuracy of inventory records over time.

Perpetual Inventory System Vs Periodic Inventory System

ParticularsPerpetual Inventory SystemPeriodic Inventory System
DefinitionComputerized recording of transactionsManual recording of transactions
Accounts updating frequencyConstantlyPeriodically
Complexity levelHigherRelatively low
Computing COGSAlways computableComputable at the end of the accounting period
How to document transactions?DigitallyPhysically
Cycle countingYesNo
Conducting investigationsUncomplicatedComplicated
Suitable consumersFirms with high gross revenues or various retail stores, or
Organizations specializing in dropshipping or marketing and delivery.
Growing businesses with little sales volume and easily trackable stockpile
Reporting purchasesRaw materials inventory account, or
Merchandise account
Purchases asset account

Frequently Asked Questions (FAQs)

What Is Perpetual Inventory System Example?

The most common perpetual inventory system example is the usage of wireless barcode scanners in a grocery store. It records all scanned transactions on the system immediately as they occur. This way, firms can easily compute the current and required stockpile.

What Are the Two Systems of Maintaining Inventory?

The two systems of maintaining inventory are perpetual and periodic inventory systems. Perpetual system continuously upgrades sales and purchase records on the software. Conversely, the Periodic inventory system manually registers the inventory updates and transactions at periodic intervals.

Companies with massive net sales must opt for a perpetual system, while start-ups can initially favor regular inventory and then move to a perpetual system with time.

How To Record Perpetual Inventory System?

Whenever a transaction occurs, the software of the perpetual inventory system registers modifications in the sales revenue account and the rates charged. Moreover, the user must know the market price, selling cost, and accounts affected to record the system.
 
The usual perpetual inventory system journal entry would display which account the software credited and debited for every transaction.

This has been a guide to the Perpetual Inventory System and its Meaning. Here we discuss the perpetual inventory system pros & perpetual vs periodic system. You can learn more about accounting from the following articles –

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Comments

  1. Regina Hughes says

    Complicated information presented in a simple and understandable manner for laypeople and we thank you.

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