What is the difference between a periodic and perpetual inventory system?

A periodic inventory system is an inventory control method where the inventory status is updated at the end of a specific period rather than after every sale and purchase.

In contrast, In a perpetual inventory system inventory status is continuously updated after every sale and purchase. This method updates data in real-time and businesses are used a computerized inventory management system.

Periodic Inventory System vs Perpetual Inventory System

What is a periodic inventory system:

In a periodic inventory system inventory is physically counted and updated at the end of a period. Physically inventory counting is time-consuming, so businesses do this once in a period. Before doing a periodic update, the system shows the previous inventory balance recorded in the previous period.

Under a periodic inventory system:

Under a periodic inventory system, inventory is counted at the end of a period. Periods may be monthly, quarterly, or annual based on their business type, size, and accounting strategies.

Periodic inventory method:

A Periodic inventory system is following a simple method. Inventory is counted once in a period. The cost of goods sold in that period is counted by taking the inventory status at the beginning of a period, adding new inventory purchases during the period, and deducting the ending inventory.

Costs of goods sold of a period= (Beginning Inventory + Purchase for the period) – Ending Inventory

Periodic system accounting:

Mr. Mohammad has a business or a company using a periodic inventory system and his business period starts on Jan. 1 and ends on Dec. 31(Once a year). In the last year (supposedly 2021), the ending or closing inventory was $50,000 and that was the beginning inventory for this year 2022. This year from Jan. 1, 2022, to Dec. 31, 2022, Mr. Mohammad purchase $75,000, and after-sales this year on Dec. 31, 2022, physically counting inventory found $65,000.

So, the Costs of goods sold are found in 2022 :
COGS= ($50,000 + $75,000) – $65,000;
=$60,000;

After finishing a period and before starting the next one, purchase inventory is recorded in the purchase account, and these are shifted to the inventory account in the next periodic update.

The periodic inventory system updates the general ledger account Inventory at the end of the period.

When you use a periodic inventory system:

Businesses that don’t need current inventory status instead it’s enough to keep tracking inventory in period periods and can use a periodic inventory system. It works well for having a small number of inventory transactions looking to keep costs low.

Since physical inventory counting is time-consuming, a periodic inventory system is suitable for businesses having a small amount of inventory where it’s easy to complete a physical count.

The periodic inventory system uses businesses having few inventory items and few inventory item units sales per month such as art galleries and car dealerships.

Advantages & disadvantages of periodic inventory system:

Every system has some advantages and disadvantages not except the periodic inventory system. The periodic inventory system is a simple, easy, and cheaper solution; but is not given real-time inventory status and is not fit for large businesses having so many products.

Advantages of periodic inventory system:

A perpetual system is better than a periodic system. But, when you don’t need a perpetual system and a periodic system is enough, It gives you a simple, easy, and cheaper inventory management solution.

Simple and easy:

Where in a perpetual inventory management system you need to be trained regular employees to manage inventory, in a periodic inventory system it’s simple and easy to manage inventory.

Cheaper to manage:

In a periodic inventory system, physical counting is once a period, no need for regular employees to manage the inventory system, seasonal employees can do this where inventory operational costs are cheaper than in the perpetual inventory system.

Disadvantages of the periodic inventory system:

A periodic inventory system may well fit some particular businesses, but it’s not fit most businesses having large numbers of products, high sales volumes, and need real-time inventory status.

1. Not fit for businesses having a large number of products and having a large number of sales per month.
2. In a periodic inventory system, you don’t get real-time inventory status. When a customer order a product, you don’t know many stocks you have.
3. With a perpetual inventory system, you have real-time sales data means you can track the trends and forecast demands based on trends that help you to prevent overstocks and understocks which is not possible in the periodic inventory system.
4. In terms of inventory shrinkage, you don’t get enough data and you can not take steps to minimize inventory shrinkage in the periodic inventory system.

What is a perpetual inventory system:

A perpetual inventory system is a real-time inventory management system where inventory status is continuously updated after every inventory movement including purchases, sales, and returns. When physically entering or leaving an inventory we enter data on a perpetual system and the system shows the inventory status. Here, we don’t count physical inventory every day rather we physically count inventories and match it with the system when making an audit which is called inventory reconciliation.

Under a perpetual inventory system:

Since the perpetual inventory system is a real-time inventory management system a good perpetual inventory offers the all features that are needed to manage inventory operations including purchases, sales, returns, transfers, and so on. In a perpetual inventory system, you can easily manage, track, and control inventory activities.

Perpetual inventory method:

Under a perpetual inventory system, you get all purchase and production data, your sales data, and the unsold items with quantities. It also gives the Cost of Goods Sold and profits in a financial period. And for this inventory system follow an inventory valuation method from the below four.

Specific Identification:

In specific identification, businesses are entered goods with a unique identification like batch or lot number and keep records of which goods are left based on its identification number. In this way, you easily manage expired dates and can minimize spoilage for both expirable and perishable goods because here you ensure sales that products will expire fast or rot first.

First-In, First-Out (FIFO):

First-In, First-Out (FIFO) is one of the most common methods of inventory management. Under this method, you sell first that product which is purchased first means first enter, first out.

Last-In, First-Out (LIFO):

Last-In, First-Out (LIFO) is the opposite of First-In, First-Out (FIFO) where the last inventory is sold first especially using restaurants, food & beverage industries to give customers fresh & spicy tastes. In this method, some products spoil, and the loss, for this reason, will be recovered with profits of sold items.

Weighted Average Cost:

With the weighted average cost method cost of goods sold(COGS) is calculated on average.

Weighted Average Cost Per Unit = Total Cost of Goods in Inventory / Total Units in Inventory

Perpetual accounting:

In the perpetual system, inventory records are updated constantly. But, in terms of accounting, we generate reports(like balance sheets, income statements, and cash flow statements) for an accounting period(like a fiscal year).

Advantages & disadvantages of perpetual inventory system:

While a perpetual inventory system gives real-time data, actual demands, and supply status, and ensures better customer services, a perpetual inventory system’s disadvantage is it’s expensive in terms of technology and manpower.

Advantages of perpetual inventory system:

In the perpetual inventory management system, continuous inventory updates and real-time data unleash opportunities and help to grow a sustainable business.

There are so many advantages you get in a perpetual inventory system; some are common and some vary business from business. Follow the following brief points which can impact a business from different angles and boost your revenues.

Real-time inventory tracking:

The perpetual inventory system is a real-time inventory tracking system where you get real-time inventory status with valuation. Order fulfillment status includes receipt, packing, shipping, and delivery status. For production houses, a perpetual inventory system gives real-time data about raw materials, work in progress, and finished goods.

Optimize inventory levels:

In the perpetual inventory system, you know real-time demands and trends. So, it helps you to optimize inventory levels and helps to minimize overstocks and understocks.

Demand Forecasting and Inventory Optimization | Proven Success

Unlock capitals from unnecessary inventory. Inventory optimization means keeping the proper levels of stocks according to demands where you can avoid empty stocks, overstocks, and dead stocks.

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Better customer satisfaction:

With real-time inventory data, you can deliver better services that help grow your business reputation.

Disadvantages of the perpetual inventory system:

The perpetual inventory system is expensive because you need different types of technical equipment and trained employees.

The expense for implementing the system:

The perpetual inventory system has some technological costs including computers, software, barcodes, scanner, and so on.

Need trained employees to manage:

To manage a perpetual inventory system you need trained employees which is expensive compared to a periodic inventory system. You have to train employees when implementing the system or accommodate the new one. To appoint new employees you have to train them which is an extra expense.

Difference between the periodic system and perpetual system:

Periodic Inventory SystemPerpetual inventory system1. Update inventory records after a periodic period.1. Update inventory records after every movement.2. Well fit for small businesses having tittle numbers of items.2. Well fit for all sizes of businesses.3. Need seasonal employees for physical counting in a period.3. Need trained employees to manage a perpetual inventory system.4. Cheaper than a perpetual inventory system.4. Expensive compared to a periodic inventory system.

The bottom line:

Periodic and perpetual both are inventory management systems with a view to managing inventory data. In a periodic system inventory data updates after a specific period and in a perpetual system data updates after every inventory movement including purchases, sales, transfers, etc. A periodic system is cheaper than a perpetual inventory system. The question is which one is better? It depends based on your business and strategy.

Frequently Asked Questions About Periodic and Perpetual Inventory System:

Periodic and perpetual both are inventory management systems. The importance of inventory management systems increasing rapidly for both small and large businesses. People search on Google. Here, I give some FAQS that are asked frequently.

Periodic Inventory System Is the Same as Physical Inventory System?

The periodic inventory system is not the same as the physical inventory system. Physical inventory means how much inventory you have in your store. The word ‘physical inventory’ comes from because the data of an inventory system and physically counted inventory may not the same for many reasons including administrative errors, shoplifting, and damage. There are no systems in the real-world named physical inventory system. It may refer to a traditional or manual inventory system where inventory activities are controlled manually and information is stored on paper. The periodic inventory system is a software system where inventory transaction data is updated periodically(for a month, three months, six months, or a year period), not for every transaction(Purchase, sale).

What is the formula for periodic inventory?

The total amount of the goods that are available to be sold=Starting inventory (based on the last physical inventory)+ Total number of purchases(In the current period)-Total number of sales(In the current period).

Is perpetual inventory LIFO or FIFO?

A perpetual inventory system may use LIFO or FIFO, any of them. LIFO(Last In, First Out) means sales first which purchase last. FIFO(First In, First Out) means sales first which purchase first. Which is used in a perpetual inventory system depending on business policies and preferences.

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