Inventory refers to all the commodities and raw materials that the firm has. In other words, the goods present with the firm at every stage of the production process come under inventory.
Since these stocks are incredibly integral to any firm, the firm adopts a method to keep its records. Inventory management systems are categorized into two types; perpetual and periodic inventory.
Keep reading this article to get insights into how these two methods differ.
Comparison Between Perpetual Inventory And Periodic Inventory
|It maintains the data on a continual basis.
|It carries out a physical count at the end of an accounting period.
|It is driven by technology.
|Human efforts drive it.
|Big firms generally use perpetual inventory.
|Small firms generally use periodic inventory.
|It cuts back on time.
|It utilizes a lot of time.
|It produces a more accurate result.
|It produces a relatively less accurate result.
Explanations of Perpetual And Periodic Inventory
What Is Perpetual Inventory?
Perpetual inventory is a mechanism of accounting for the goods in hand (inventory). It is a relatively new and advanced inventory system. It keeps records of the goods sold or bought constantly with the help of technology.
The technology that this system employs is point-of-sale software. Regular updates are made in the databases with any change in the inventory records.
Because of its higher efficacy and accuracy, the perpetual inventory system has witnessed rapid growth in its usage.
What Is A Periodic Inventory?
Periodic inventory is another mechanism of accounting for the inventory. However, unlike the perpetual inventory system, this system does not rely on technology.
Under the periodic inventory system, firms physically count their inventory. However, since this process is excessively time and labor-intensive, it is not carried out daily. Instead, the exercise is conducted periodically.
Key Differences between Perpetual Inventory and Periodic Inventory
- It maintains records of inventory on a regular basis.
- Changes are updated straight away.
- It is a computerized method.
- It can make use of cycle counting.
- It makes consistent revisions to the cost of goods sold account.
- Under it, physical counting takes place.
- The counting exercise is performed after a certain period.
- It is a manual method.
- It cannot make use of cycle counting.
- It estimates the cost of goods sold after counting the inventory.
Significant Differences Between Perpetual Inventory And Periodic Inventory
Cost Of Goods Sold
That is why this inventory system is considered more reliable when it comes to the estimation of the cost of goods sold.
Use Of Computerised Systems
Size Of The Firms
Usage Of Cycle Counting
Time And Labor
Impact On Business
Usage and Consequences: Perpetual Inventory VS Periodic Inventory
- It is best for big firms.
- The use of technology cuts time significantly.
- Human efforts required are less.
- The errors are relatively fewer.
- There are no ramifications for business activities.
- It is best for small firms.
- The use of manual labor consumes a lot of time.
- A great deal of human effort is required.
- The errors are relatively more.
- Business activities have to be stopped.
(FAQs) Frequently Asked Questions
1. What are the advantages of a perpetual inventory system?
The perpetual inventory system is advantageous because it saves time and effort. Moreover, it also decreases the risk of discrepancies.
2. What is the demerit of a perpetual inventory system?
The perpetual inventory system is expensive as it has an exorbitantly high setup cost.
Besides setting up the system, there is also a requirement to train employees to use the software and carry out the process.
3. What is the benefit of a periodic inventory system?
The periodic inventory system is a cheaper method that does not entail any cost for setup.
4. Which businesses are likely to use a periodic inventory system?
Small businesses or firms with less inventory and low sales are more likely to use a periodic inventory system.
5. Why is a perpetual inventory system superior to a periodic inventory system?
The reason behind the superiority of perpetual inventory over periodic inventory is that perpetual inventory is performed with the help of computer systems and software. This results in more accurate results with little effort and time.
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