The main difference between perpetual inventory system and periodic inventory is that perpetual inventory system is a method of inventory valuation where the increase or decrease in inventory is recorded immediately after a sale or purchase whereas periodic inventory taking refers to the practice of physical checking or counting of the inventory that a business maintains on regular basis. Inventory is one of the organization's most vital current assets. While both of these procedures are very important in terms of inventory, perpetual inventory is a system of inventory valuation while periodic inventory is a method of checking inventory.
The periodic inventory system is often used by small businesses that have easy-to-manage inventory and may not have a lot of money or opportunity to implement computerized systems in their workflow. As such, they use physical occasional inventory to measure their inventory and cost of goods sold (COGS).
Companies may not necessarily be aware of the inventory they are holding before the counts are made, which are done at regular intervals - weekly, monthly or quarterly. Here's how the process works:
- The party responsible for the inventory records all the inventory available at the end of the period
- Purchases of goods are recorded in the purchases account
- This is transferred to the inventory account after the inventory
- This new balance is then applied to the start of the new period, after which the process begins again.
Because companies often carry products in the thousands, doing a physical count can be difficult and time consuming. Imagine you own a stationery store and try to count and record every ballpoint pen in stock. Now multiply that into the office supply chain. This is why many companies only take a physical count once a quarter or even once a year. For companies that are subject to a periodic system, this means that inventory account numbers and cost of goods sold are not necessarily very recent or accurate.
Cost of goods sold includes items such as direct labor and material costs and direct factory overheads.
What is the perpetual inventory system?
A perpetual inventory system is a method of inventory valuation in which excess or decrease in inventory is recorded immediately after a sale or purchase. This system continuously tracks stock balances and provides complete details of changes in stock through instant reports.
The main advantage of a perpetual inventory system is that it shows how much inventory is available at any given point in time and is a successful way to prevent stockouts. Further, since inventory levels are updated on a real-time basis, the balance in the inventory account and the cost of goods sold account remain correct throughout the accounting year. This is vital because inventory is one of the most important current assets and ratios such as inventory turnover ratio must be calculated for working capital management decisions. At the end of the year, the standing system will compare the physical inventory balance with the accounting records to check if there are any discrepancies.
A perpetual inventory system tracks inventory balances on an ongoing basis. This is done through computerized systems that use point of sale (POS) and enterprise asset management technology that records inventory purchases and sales. It is much more complex than the cyclical system of inventory management.
Advantages of the inventory management system from fekrait Software
Through fekrait Software platform for inventory management, you can:
- Automate repetitive manual tasks
- Increase operational efficiency
- Integrate your business processes
- Provide accurate inventory reports
- Improve the supply of goods
- Order management and execution
- Multi-channel sales
- Serial and batch tracking
- Billing management
- Vendor relationship management
- Ecommerce API
- One-click integration with the best online marketplaces
- List of items online
- Multi-channel management
- Inventory sync
- Shipping orders