Periodic Inventory System
Perpetual Inventory System
The perpetual inventory system is a system in which each sale and purchase transaction related to merchandise is recorded directly to the inventory account and corresponding subsidiary ledger. As one of the most widely used inventory systems, the perpetual inventory system mandates a continuous updating of inventory records with each sale and purchase. As a result, the perpetual inventory system provides the most accurate real-time reflection of inventory in that both the quantity and value of the inventory are perpetually updated.
The perpetual inventory system requires more effort on a day-to-day basis than the periodic inventory system, as each time inventory moves it must be recorded. However, advances in technology have made this process much easier. Merchandising businesses are able to track inventory items in a cost-effective manner using a computerized system that utilizes bar codes. For example, Walmart uses bar codes to account for its inventory items. Car dealerships utilize a unique vehicle identification number (VIN) to keep up with their inventory. As items' bar codes are scanned, inventory records are reduced for sold items, providing better inventory controls.
Periodic versus Perpetual Inventory System
The periodic and perpetual inventory systems differ in several key ways. One example is a timing difference. The perpetual inventory system records transactions as they occur. Under this system, inventory balances can be seen in real time. For example, if you were to ask a sales associate at Happy T's if they had a particular T-shirt in stock, they would be able to tell you exactly how many they have. However, if the business uses the periodic inventory system, they would not have the ability to pull up the inventory records of a particular T-shirt and know for sure what the current inventory level is because it is possible the inventory level of that T-shirt has changed since the last physical count.
The journal entries used to record transactions under each system are also different. When a sale occurs, the inventory and relevant costs are recorded under the perpetual inventory method. However, no entry is made under the periodic inventory method. Under the periodic inventory method, a physical count must be done in order to determine how much inventory is left. The beginning and ending inventory balances and purchases can then be used to determine cost of merchandise sold. The physical count and cost of merchandise sold calculations are not necessary under the perpetual inventory system because this data is recorded throughout the period each time a transaction takes place. Perpetually recording each transaction means that the ending inventory balance should be correct at the end of the period and all cost of merchandise sold should already be recorded. It is worth noting that even businesses using the perpetual inventory method must still do a physical count of their inventory from time to time, generally once a year at a minimum. The physical count is done to ensure the accounting records are accurate.