Perpetual Inventory and Periodic Inventory are two methods used in the field of inventory management and control. Both methods aim to track the quantity and value of inventory items held by a company, but they differ in terms of the frequency and approach to updating inventory records.
Perpetual Inventory System:
The Perpetual Inventory System is a method of tracking inventory levels in real-time. It maintains a continuous and up-to-date record of each individual inventory item. Every change in inventory, whether it’s an addition or a deduction, is recorded immediately. This system is usually reliant on electronic devices, such as barcode scanners, to keep track of inventory movement. As a result, the Perpetual Inventory System provides accurate and reliable inventory data at any given time.
With the Perpetual Inventory System, every time a product is sold, the quantity is deducted from the inventory record, and the cost of goods sold is calculated accordingly. Similarly, when new stock is received, it is added to the inventory record. This method allows businesses to have a clear picture of their inventory levels at all times, enabling them to make timely decisions on reordering or restocking.
Periodic Inventory System:
The Periodic Inventory System, on the other hand, is a method of updating inventory records periodically. Unlike the Perpetual Inventory System, this approach does not require a continuous and detailed record of individual inventory items. Instead, it relies on physical stock counts performed at regular intervals, such as monthly or annually, to determine the quantity and value of inventory on hand.
With the Periodic Inventory System, the cost of goods sold is not calculated with each sale but rather determined by subtracting the ending inventory from the total purchases made during the accounting period. This method is less time-consuming and does not rely heavily on technology. However, it is more susceptible to errors and may result in less accurate inventory data due to the time gap between stock counts.
Choosing Between Perpetual Inventory and Periodic Inventory:
Deciding which inventory system to implement depends on the nature and needs of a business. The Perpetual Inventory System offers real-time visibility into inventory levels, enabling businesses to minimize stockouts and optimize their inventory management. It is particularly beneficial for companies dealing with perishable goods, high-value items, or a large number of SKUs. However, this system requires a higher initial investment in technology and ongoing maintenance.
The Periodic Inventory System, on the other hand, may be suitable for small businesses with low inventory levels or those with less complex product lines. It is less costly to implement and maintain since it does not rely heavily on advanced inventory management software or devices. However, it may not provide accurate and timely information on inventory levels, which can potentially lead to stockouts or overstocking.
In conclusion, Perpetual Inventory and Periodic Inventory are two different methods of tracking and managing inventory. The Perpetual Inventory System offers real-time visibility and accuracy, while the Periodic Inventory System relies on periodic physical counts. Businesses should carefully evaluate their specific needs and resources to determine which inventory system is most appropriate for their operations.