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| Corporate Practice bd |
Perpetual Inventory System vs. Periodic Inventory System-With Examples
In accounting and inventory management, there are two primary systems used to track inventory: perpetual inventory system and periodic inventory system. Here’s how they differ:
Perpetual Inventory System
Definition:
Continuous Tracking:
The perpetual inventory system continuously tracks the quantity of inventory in real-time.
Transactions Recorded:
Each purchase, sale, or return of goods is immediately recorded in the inventory account.
Accuracy:
Provides a highly accurate reflection of current inventory levels.
Technology Dependence:
Often relies on barcode scanners, RFID, or inventory management software.
Cost of Goods Sold (COGS):
COGS is calculated continuously based on the inventory records.
Advantages:
Real-Time Information:
Provides up-to-date information on inventory levels.
Accurate Costing:
Facilitates accurate cost of goods sold calculation.
Inventory Control:
Enables better inventory control and management.
Less Physical Counting:
Reduces the need for frequent physical inventory counts.
Disadvantages:
Complexity:
Requires robust systems and processes to maintain accuracy.
Cost:
Initial setup and ongoing maintenance costs can be higher.
Technology Reliance:
Vulnerable to technology failures or errors.
Periodic Inventory System:
Definition:
Intermittent Tracking:
The periodic inventory system updates inventory records periodically, typically at the end of an accounting period (e.g., monthly, quarterly).
Transactions Recorded:
Purchases are recorded in a purchases account; no continuous updating of inventory records.
Physical Counts:
Inventory counts are performed periodically to determine the ending inventory.
Cost of Goods Sold (COGS):
COGS is calculated by subtracting the ending inventory from the cost of goods available for sale.
Advantages:
Simplicity:
Easier to implement and maintain, especially for small businesses.
Cost-Effective:
Lower initial setup costs compared to perpetual systems.
No Technology Dependence:
Less vulnerable to technological issues.
Disadvantages:
Inventory Delays:
Lack of real-time inventory information may lead to stockouts or overstocking.
Accuracy Issues:
Relies on periodic physical counts, which can be prone to errors.
COGS Calculation: COGS is estimated and may not reflect current costs accurately.
Comparison between Perpetual Inventory & Periodic Inventory System
|
Feature |
Perpetual Inventory System |
Periodic Inventory System |
|
Tracking Frequency |
Continuous tracking of inventory levels in real-time. |
Periodic updates; inventory counts at intervals. |
|
Transaction Recording |
Each transaction (purchase, sale) updates inventory. |
Purchases recorded separately; no real-time update. |
|
COGS Calculation |
Calculated continuously based on perpetual records. |
Calculated periodically based on physical counts. |
|
Inventory Accuracy |
Highly accurate; reflects real-time inventory levels. |
Accuracy depends on periodic physical counts. |
|
Technology Dependency |
Relies on technology (barcode scanners, software). |
Less reliant on technology; manual processes. |
|
Complexity |
More complex setup and maintenance. |
Simpler to implement and maintain. |
|
Suitability |
Suitable for large-scale operations and retail. |
Suitable for small businesses and less frequent transactions. |
Conclusion:
The choice between perpetual and periodic inventory systems depends on the size of the business, nature of operations, and need for real-time inventory information. Larger businesses with high transaction volumes often benefit from the accuracy and control offered by perpetual systems, while smaller businesses may find periodic systems more practical and cost-effective.