20+ Difference Between Perpetual And Periodic Inventory (Explained)

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.

In This Article

Comparison Between Perpetual Inventory And Periodic Inventory

Parameters	Perpetual Inventory	Periodic Inventory
Method Used	It maintains the data on a continual basis.	It carries out a physical count at the end of an accounting period.
Technology	It is driven by technology.	Human efforts drive it.
Firm Size	Big firms generally use perpetual inventory.	Small firms generally use periodic inventory.
Time	It cuts back on time.	It utilizes a lot of time.
Correctness	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.

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Key Differences between Perpetual Inventory and Periodic Inventory

Perpetual 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.

Periodic Inventory

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

Perpetual Inventory- Under this mechanism of tracking inventory, continuous updates are also made in the cost of goods sold account. These updates are done immediately as soon as a sale is made.

That is why this inventory system is considered more reliable when it comes to the estimation of the cost of goods sold.

Periodic Inventory- In a periodic inventory system, any entry in the cost of goods sold account does not occur until the end of an accounting period. The cost of goods is evaluated as a lump sum only after the physical count has been completed.

Use Of Computerised Systems

Perpetual Inventory- This inventory method makes use of technology, particularly computerized systems and software, to keep track and make regular updates. Thus to a large extent, this method is automated.

Periodic Inventory- There is no use of technology under the periodic inventory system. It depends on human labor. In simpler terms, it keeps track of the inventory manually.

Size Of The Firms

Perpetual Inventory- Perpetual inventory is more suitable for big firms since they have vast amounts of sales and inventory. In addition, this computerized method will make the task of accounting for inventory much easier for such firms.

Periodic Inventory- Since the periodic inventory system is entirely dependent on manual labor, it is not convenient for big firms. However, small businesses or firms with manageable volumes of inventory and sales will find this method fitting.

Usage Of Cycle Counting

Perpetual Inventory- Cycle counting is the method of regularly counting a section or certain quantity of inventory at a particular period to guarantee the correctness of inventory counts. Cycle counting can be used under a perpetual inventory system.

Periodic Inventory- There is no way of utilizing cycle counting under a periodic inventory system.

Time And Labor

Perpetual Inventory- Perpetual inventory system is an automatic mechanism for keeping track of the inventory. Since it is a computerized system, the time and labor required are minimal.

Periodic Inventory- Physical or manual counts are necessary for this inventory method. As a result, it requires a considerable amount of human labor. Not only that, but this system is also highly time-consuming.

Accuracy

Perpetual Inventory- There is rarely any room for errors in the case of perpetual inventory. The accuracy level is higher because the software keeps regular records and tracks the changes immediately. This is the reason why perpetual inventory is considered better than periodic inventory.

Periodic Inventory- Wherever human labor is used, human errors are inevitable. Consequently, there is a higher chance of mistakes.

Impact On Business

Perpetual Inventory- There is no impact on the business operations while carrying out perpetual inventory. The reason is that it is a perpetual and computerized process.

Periodic Inventory- All business operations must be halted for carrying out periodic inventory.

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Usage and Consequences: Perpetual Inventory VS Periodic Inventory

Perpetual 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.

Periodic Inventory

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.