The material is an integral part of the production cost, as it is composed of 80% of the total product cost. So every manufacturing concern keeps a track of its inventory purchased, returned and issued during the year, through the inventory record system. The inventory system is of two types: Perpetual Inventory System, in which the movement of the stock is recorded continuously and Periodic Inventory System, which updates the inventory records from time to time only after the physical count of the stock.
Inventory management system should be by the store’s department selected, keeping in mind, the planning and control of stock. Many people utter confusion in understanding the two methods, so here in this article, we provide you all the important differences between the Perpetual and Periodic Inventory system, in tabular form.
Content: Perpetual Inventory System Vs Periodic Inventory System
|Basis for Comparison||Perpetual Inventory System||Periodic Inventory System|
|Meaning||The inventory system which traces every single movement of inventory, as and when they arise is known as Perpetual Inventory System.||The Periodic Inventory System is an inventory record method whereby, the inventory records are updated at periodic intervals.|
|Basis||Book Records||Physical Verification|
|Updations||Continuously||At the end of the accounting period.|
|Information about||Inventory and Cost of sales||Inventory and Cost of goods sold|
|Balancing Figure||Inventory||Cost of Goods Sold|
|Possibility of Inventory Control||Yes||No|
|Affect on business operation||This method does not influence the business operation.||Under this system, the business operations need to be stopped during valuation.|
Definition of Perpetual Inventory System
The inventory control method in which every inflow and outflow of stock are constantly updated, through an electronic point of sale system, is known as Perpetual Inventory System. The records maintained under this system are always up to date. In this system an inventory ledger is maintained to keep complete and continuous record of the receipts and issue of inventory in which the closing balance is the inventory in hand. The calculation of closing inventory can be done as under:
Inventory at the Beginning + Receipts – Issues = Inventory at the end
The inventory records are kept in Bin Card (Stores Keeper) and Stores Ledger (Cost Accounting Department). To ensure accuracy, physical verification of stock takes place at regular intervals, and they are compared with the recorded figures. If there is any shortage due to loss or theft, then it can be easily located, and corrective actions can also be taken immediately. Although the system is costly and complicated.
Definition of Periodic Inventory System
The inventory record system in which the movement of inventory is captured at a regular interval, say once or twice in a year, only after taking physical verification of stock is known as Periodic Inventory System. Normally, at the end of the financial year, the physical count of stock takes place after which the records are adjusted and updated accordingly. The following formula is used to track the cost of goods sold during the year:
Inventory at the Beginning + Purchases – Inventory at the end = Cost of Goods Sold
There are various shortcomings of this system as the amount of the cost of goods sold may include the goods lost or theft during the year. However, with the help of sales revenue, an estimation could be made regarding the lost inventory but this figure is not accurate. If the physical valuation of the stock is done more than once in a year, then this system can also cost higher. Discrepancies can be detected only at the end of the accounting period.
Key Differences Between Perpetual and Periodic Inventory System
The following are the major differences between perpetual and periodic inventory system:
- The inventory system in which there is real time recording of the receipts and issues of inventory is known as Perpetual Inventory System. Periodic Inventory System tracks the details of inventory movement at periodic intervals.
- The Perpetual Inventory System is based on book records while Periodic Inventory System, takes physical verification as its base.
- In Perpetual Inventory System the records are updated continuously, i.e. as the stock transaction takes place. Conversely, in Periodic Inventory System the records are updated after a short duration.
- In Perpetual Inventory System, real-time information about Inventory and Cost of sales is provided whereas the Periodic Inventory System provides information about Inventory and Cost of goods sold.
- In Perpetual Inventory System, the loss of goods is included in closing inventory. Conversely, in Periodic Inventory System the same is included in Cost of Goods Sold.
- In Perpetual Inventory System, there is no interference in the regular workflow at the time of stock taking and verification while in Periodic Inventory System, the regular business operations may have to be stopped.
The Periodic Inventory System is less costly than the Perpetual Inventory System, but it gives more accurate information because ongoing recording and timely verification of inventory are done. In addition to this, the financial statements are also prepared quickly as the inventory records are maintained properly in the Perpetual Inventory System, which is not possible in case of Periodic Inventory System. The Perpetual Inventory System is best suited for big enterprises while small businesses can go for Periodic Inventory System