Perpetual Inventory System

Last Updated :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

Aaron Crowe

Reviewed by :

Dheeraj Vaidya

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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.

  • 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 revenue account. It certainly confirms that accounting documents display specific balances in the affected accounts. Furthermore, the market price, purchase price, and accounts affected are crucial elements of the perpetual inventory system journal entry.

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 system will certainly cost her a lot of time and additional expenses.

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 Sold (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 chain, 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 auditors get financial statements like an inventory checklist with related unit quantities and placements for the stock-taking 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 quantity 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 point and thus, avoids the problems associated with overstocking. Moreover, utilizing Point of sales 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 –