Inventory is the lifeblood of your small business, necessary to grow your company and make a profit. But how do you successfully manage inventory ? There are two main types of inventory systems that you can choose from. The perpetual inventory system keeps an ongoing record of your company’s inventory balance, while the periodic inventory system records the amount at established intervals. Although both systems work, you should keep their differences in mind when choosing which one is best for your company. Show
Perpetual Inventory SystemThe perpetual inventory system constantly maintains the amount of inventory you own and sell in real time. The greatest benefit of this system is always having an accurate idea of how much inventory your company has on hand. At any time, you’re able to check your balance sheet, see the total dollar amount of inventory, and know how much you have on hand. Another advantage of a perpetual inventory system is its automation. Because you always maintain the inventory level, your accounting system automatically counts and reconciles inventory. A drawback of the perpetual inventory system is the cost. Because you need software that communicates every purchase and sale, perpetual inventory systems are usually more expensive than other systems. Plus, there are ongoing maintenance costs to consider to ensure the inventory system runs correctly. Periodic Inventory SystemA periodic inventory system is a method of occasionally counting inventory. The financial statements still track and report inventory but knowing the exact amount of inventory at all moments isn’t a priority. Instead, you reconcile inventory on a monthly or quarterly basis to reconcile business activities and identify possible obsolescence or theft. The main benefit of a periodic inventory system is its simplicity. It requires less maintenance and is more affordable. On the downside, a periodic system requires a large effort and may even be a manual system. You can speed up a periodic inventory by using mobile inventory apps that integrate with Quickbooks . This means you have to count the amount in inventory at the end of each period, so you end up using your cost of goods sold in between. A periodic inventory system sacrifices a bit of quality and accuracy. Advantages and Disadvantages of Inventory SystemsChoosing the inventory system that’s right for your small business typically comes down to two questions. It’s beneficial for your business to consider whether you have a pressing need to know the inventory balance at all times. This may be very important in some industries, such as perishable food items inventory . Another factor to consider is security. If your goods are susceptible to theft or breakage, it may be wise to have stronger internal controls. When trying to secure loans or other financing, having real time, updated information can work to your benefit. As a business owner, you need to decide how much money you want to spend on an inventory system. A perpetual system costs more than a periodic system. In cases where you want more security over your items, a perpetual inventory system immediately lets you know if something is unaccounted for. Because a periodic inventory count may not happen for an entire month, your response time is usually slower. Consider what the task of counting your inventory looks like. Do you have many unique items, or do you have thousands of small items? Are your inventory items valuable, or would miscounting one inventory item not make much of a difference? It’s just a matter of deciding which of the two methods works best for you. It’s a good idea to keep a close eye on your small business’s inventory as well as other key factors. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free. Related ArticlesLooking for something else?Get QuickBooksSmart features made for your business. We've got you covered. Firm of the FutureExpert advice and resources for today’s accounting professionals. QuickBooks SupportGet help with QuickBooks. Find articles, video tutorials, and more.  In a business environment, where physical goods are being sold or purchased, it is essential to have an inventory management system. These inventory management systems divide into two major categories, called perpetual systems and periodic systems. The periodic and perpetual inventory systems are different methods to track the quantity of goods on hand. Content: Perpetual Inventory System Vs Periodic Inventory System
DefinitionPeriodic Inventory System MeaningThe periodic inventory system relies upon an occasional or timely physical count of the inventory to determine the level of inventory and the cost of goods sold (COGS). Under periodic inventory, the inventory account and COGS account are updated in a timely manner – this could be once a month, once a quarter, or once a year. Perpetual Inventory System MeaningThe perpetual inventory system keeps continual track of inventory balances and requires much more record keeping to maintain. Whenever a product is received or sold, updates are made automatically. Purchases and returns are immediately recorded in the inventory account. Perpetual inventory system uses digital technology to track inventory in real-time. Differences Between Perpetual and Periodic Inventory1. Accounts handled in Perpetual and Periodic Inventory SystemWhen it comes to a periodic system, the records related to the cost of goods sold calculates in general journal entries. However, a perpetual system will update the accounts throughout the time of the accounting period. 2. Purchases involved in Perpetual and Periodic Inventory SystemAnother difference between perpetual and periodic inventory system is the purchases. When you take a look at a periodic system, a single entry is fed into the purchase account and the total purchase amount. On the other hand, the perpetual systems will record the total amount of stock purchased, along with the recording of the total number of units that have been purchased. 3. Sales Accounts in Perpetual and Periodic Inventory SystemWhen using a periodic system, a single entry is for the sale amount and the goods reflecting that. But when it comes to a perpetual system, two entries will be recorded. The first entry will refer to the sales amount, and the second entry will refer to the cost of goods sold. 4. Cost of goods sold in Perpetual and Periodic Inventory SystemThe periodic system would calculate the cost of goods sold once the stocktake takes place using the calculation as mentioned above. Then a single amount enters the booking. But when it comes to a perpetual system, the cost of goods sold updates at every single time a sale is being made. 5. Closing entries in Perpetual and Periodic Inventory SystemIn a periodic system, enter the closing entries to showcase the cost of goods on the sale. This helps you to understand what is left in your hands. However, a perpetual system will update the accounts continuously. Therefore, no closing entries will be recorded. 6. Investigating transactions in Perpetual and Periodic Inventory SystemWhen it comes to a periodic system, the transactions are not log in a unit level. As a result, it is quite challenging to investigate the transactions that are linked with mistakes in the inventory. However, a perpetual system would record every transaction per inventory unit, which helps you with understanding the errors. 7. Stock turnover rates in Perpetual and Periodic Inventory SystemThe last difference between perpetual and periodic inventory system is about stock turnover rates. The financial indicators play a significant role when determining the success of a product. However, the periodic system doesn’t provide a clear idea of how to calculate stock turnover rates. It will only record the cost of goods sold in intervals. However, a perpetual system will be able to provide you with an accurate view of stock data at all times. Comparison Chart
Conclusion on Perpetual vs PeriodicThese key differences make it clear that the perpetual inventory system is vastly superior to the periodic inventory system. A perpetual inventory system is, nowadays, preferred over the old system of periodic inventory. However, a periodic system might work in cases where the amount of inventory is very small. In that situation, you don’t need detailed stock records and you can review it visually. << Previous Post – Advantages of Perpetual Inventory >> Next Post – Disadvantages of Perpetual Inventory What is the difference between a periodic inventory system and a perpetual inventory system quizlet?The primary difference between the periodic and perpetual inventory systems is: The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period.
What is the difference between periodic and perpetual accounting?The key difference between periodic and perpetual accounting is timing. Periodic inventory is done at the end of a period to create financial statements. Perpetual inventory is done as sales and inventory purchases happen.
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