QUESTIONS
- Differentiate b/w Perpetual & Periodic inventory system.
- Which system (Perpetual & Periodic) seems more better as compare to others.
- What are the specific type of companies which are using Perpetual inventory system & which are using Periodic Inventory System.
Difference between Perpetual and Periodic inventory system
| Perpetual inventory system | Periodic inventory system |
| Following are the main differences between perpetual and periodic inventory systems: | |
| Inventory Account and Cost of Goods Sold Account | |
| Inventory Account and Cost of Goods Sold Account are updated continuously during the period in perpetual inventory system. | Inventory Account and Cost of Goods Sold Account are updated only at the end of the period in periodic inventory system. |
| Purchases Account and Purchase Returns and Allowances Account | |
| In perpetual inventory system purchases are directly debited to inventory account and purchase returns are directly credited to inventory account. | Purchases Account and Purchase Returns and Allowances Account are only used in periodic inventory system and are updated continuously. |
| Sale Transaction | |
| Sale Transaction is recorded via two journal entries in perpetual system. One of them records the sale value of inventory whereas the other records cost of goods sold. | In periodic inventory system, only one entry is made. |
| Closing Entries | |
| Perpetual inventory system does not require closing entries for inventory account. | Closing Entries are only required in periodic inventory system to update inventory and cost of goods sold. |
Which system (Perpetual Inventory System & Periodic Inventory System) seems more better as compare to others.
Inventory systems help owners align their stock with product demand. There are two traditional methods
of calculating inventory,
- Perpetual Inventory System
- Periodic Inventory System
There are benefits and downfalls of each system.
Keep reading to find out what they are so you can make an educated, informed choice for your business.
Perpetual Inventory
According to Kenneth Hamlett, the perpetual inventory system is the most popular choice for modern businesses.
This system was created when customer transactions could be completed with a digital scanner, which sends information about every sale directly to a central computer. When a product is sold, the computer system knows that there is one fewer item in the businesses inventory, and it can deduct that amount from the total number of products in stock.
This method requires computer software, such as Fishbowl or InFlow, for owners to access details about their inventory. The proper software can alert owners when product amounts are low, or it may even order items automatically. Once it is operational, this method helps prevent human error and keeps a continuous count of every item in stock.
The Drawback to perpetual inventory, as Hamlett points out, is the initial startup cost. In order to work correctly, multiple scanners, computers, and software must be purchased before any sales can be calculated. There are also barcode expenses, which must be placed on each product, and time spent when initially entering the business’s products into the computer system.
Periodic Inventory
Periodic inventory is a non-continuous process that relies on a purely manual process to track sales and returns. Every week, month, or year—depending on the owner’s choice and type of business—staff measures the count of items sold against the number of items previously listed in the inventory. At the end and beginning of each period, businesses that use the periodic system will know exactly how many items are in stock.
The advantage to periodic inventory is that the start-up costs are minimal. Everything can be completed with pen and paper, so no computers are necessary. The greatest drawback, however, is the effort required to maintain an accurate inventory while not knowing exactly how many items are in stock at any one time. Item counts completed each week, for instance, can absorb a lot of time that could be better spent on other tasks.
A Mixed Method: Using Both Inventory Systems
Business owners can benefit by employing the benefits of both inventory systems. The perpetual method, once established, is superior in many respects, but owners may also desire to manually check their stock once or twice a year, to make sure that actual product counts are in line with the electronic count.
Items that are misplaced, lost, or stolen won’t be recorded within the electronic system, but the amount of products on hand is still important when considering how owners will best meet the needs of their customers.
For almost any modern small business, using a mixed method may be the best way to ensure inventory counts are current and reliable. However, a business does need to have cash on hand to purchase the needed software and electronic components to support the perpetual inventory aspect. While costs is certainly a factor, an inventory system is not something to skimp on. Business owners should take the time to research and find out which software will work best with their style of business. A relatively small investment now can go a long way toward creating a profitable future.
What are the specific type of companies which are using Perpetual inventory system & which are using Periodic Inventory System.
A perpetual record of inventory shows the what should be in stock at any one time. This needs to be verified from time to time, with a physical stock count and valuation.
Under this system, purchases of inventory are coded to inventory, and the cost of goods sold, and inventory accounts are up dated after every sale. Then when the stock take is done, any adjustments are made for shrinkage.
The periodic system allows purchases of inventory to be debited to the purchases account. The inventory account which is a current asset is only adjusted at the end of the accounting period.
The type of accounting system would depend on if the business has a slow stock turn over or a rapid one.
Car yards would probably use the Periodic as they may only sell one car a month.
A supermarket may use the Perpetual system as they sell the same variety of product many times a day.