Difference Between Periodic Inventory System and Perpetual Inventory System

Edited by Diffzy | Updated on: April 30, 2023

       

Difference Between Periodic Inventory System and Perpetual Inventory System

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Introduction

The material is an essential component of the production cost, accounting for 80% of the overall product cost. As a result, using the inventory record system, every manufacturing company maintains track of its inventory acquired, returned, and issued throughout the year. There are two types of inventory systems: perpetual inventory systems, in which stock movement is continually documented, and periodic inventory systems, in which inventory records are updated only after a physical count of the stock. The periodic and perpetual inventory systems are two ways of tracking the number of products on hand.

The perpetual system is the most advanced of the two, but it takes considerably more record keeping to maintain. The periodic method depends on an infrequent physical inventory count to calculate the final inventory balance and cost of products sold, whereas the perpetual system keeps track of inventory balances continuously. The periodic method depends on an infrequent physical inventory count to calculate the final inventory balance and cost of products sold, but the perpetual system maintains track of inventory balancing continuously. Keeping track of the stock account is a difficult chore.

There may be both little and major undertakings. The firm will select between a periodic inventory system and a perpetual inventory system based on the requirements. Many businesses make use of both. These two procedures are often regarded as the best accounting practices available.

Periodic Inventory System vs. Perpetual Inventory System

Inventory refers to any raw materials and completed commodities that businesses keep on hand for manufacturing or that are sold to customers on the market. Periodic inventory and perpetual inventory are the two forms of inventory. Both are accounting systems used by organizations to keep track of the number of things they have on hand. They are, nevertheless, fundamentally distinct. Periodic inventory requires a physical count at different points in time, whereas perpetual inventory is automated and uses point-of-sale and enterprise asset management systems. The former is less expensive to accomplish, but the latter requires more time and money.

The primary distinction between the Periodic Inventory System and the Perpetual Inventory System is that the former performs real-time recording while the latter tracks record at specific levels. The periodic inventory system is often utilized with little amounts, whereas the perpetual inventory system is typically used with huge amounts. The periodic Inventory System does not record transactions at the unit level, making it difficult to discover problems. The stock turnover rate is not displayed. It will only allow us to record the things that are sold at specific intervals and times. The perpetual inventory system is a method in which the variations of the account are recorded continually, whereas the periodic inventory system is a technique in which the records of the accounts are updated regularly after the physical computation.

The perpetual system is an account holding system in which profits are recorded in real-time and inventory is also tracked, whereas the periodic inventory system is an account holding system in which the order is tracking the information of inventory movement of periodic interludes.

Difference Between Periodic Inventory System vs Perpetual Inventory System in Tabular Form

Parameters of Comparison Periodic Inventory System Perpetual Inventory System
Meaning The Periodic Inventory System is an inventory record technique in which inventory records are updated regularly. The Perpetual Inventory System is a goods system that tracks every single movement of inventory as it occurs.
Advantages Everything will be recorded in a single purchase. We don't require a large investment. We can make investments with fewer materials.
Disadvantages All processes will take time. Theft might readily occur throughout the transaction.
Purchase Purchases will be recorded as a single total. Purchases will only be reported in the appropriate accounts.
Balancing Figure Price of Goods Sold Inventory
Updates At the end of the fiscal year Continuously
Influence on company operations Under this technique, company activity must be halted during appraisal. This approach does not affect corporate operations.

What is the Periodic Inventory System?

A periodic Inventory System is an inventory record system in which the movement of inventory is logged at regular intervals, say once or twice a year, only after physical verification of stock. Normally, after the fiscal year, a physical stock count is performed, following which the records are amended and updated accordingly. A physical count of the inventory will be done in a periodic inventory system at certain levels. This approach is used to count physical inventory, which determines the cost of products sold. It is best used for small stocks since it needs manual entry, which can lead to human mistakes. Companies may not be aware of how much inventory they have unless they do regular inventory counts—weekly, monthly, or quarterly.

Because firms sometimes carry thousands of goods, completing a physical count may be difficult and time-consuming. Consider running an office supply business and attempting to count and record every ballpoint pen on the shelf. The periodic inventory system is a procedure in which the system updates the records of the accounts after the corporal cunning; the periodic inventory system's foundation relies on environmental approval. A periodic inventory system is an inventory system that values inventory regularly, typically monthly, quarterly, or annually. Accounting records will be checked against physical inventory balances after the quarter to see if there are any discrepancies. The cost of items sold using this approach may be estimated as shown below.

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold

When a corporation acquires new goods, it first updates the purchases account. The inventory must then be physically counted to confirm the inventory change. The figures are subsequently transferred to the general ledger account. This approach has several flaws, including the fact that the cost of items sold may include products lost or stolen over the year. However, an estimate of the lost inventory might be generated using sales income, although this amount is not precise. Any number of purchases can be made in this system, although stocky purchases will not be made frequently. During this period, just a few stocks will be acquired.

The periodic inventory approach will have certain drawbacks as well. The physical counting of stock records will be done at the end of the year so that the records may be modified and updated accordingly. The majority of periodic inventory system applications include keeping manual records in the purchase register, etc. The periodic inventory system is less expensive than the perpetual inventory system since it requires less labor and personnel. The worker's cost is lower than the cost of the perpetual inventory system. The ending stock is calculated corporally and deducted from the price of items sold.

What is Perpetual Inventory System?

The perpetual inventory system is a process in which the variants of accounts are constantly noticed after every transaction, the perpetual inventory system's foundation is done on book records, the perpetual inventory system is constantly notifying, and the perpetual inventory system also balances the number of documents. The perpetual inventory system provides information on inventory and transaction pricing. Because the company knows the measurements, the perpetual inventory system has the potential to regulate inventory. The perpetual inventory system assesses inventory changes in real-time and does not require physical inventory for recording reasons. It will precisely display the actual stock. It employs two devices known as Point-of-Sale Systems and Scanners. Perpetual Inventory System is an inventory control approach in which every inflow and outflow of merchandise is continually updated using an electronic point of sale system. The records kept by this system are constantly up to date. In this method, an inventory ledger is kept to preserve a thorough and continuous record of inventory receipts and issues, with the closing balance being the inventory in hand. The closing inventory can be calculated as follows:

Inventory at the start + Receipts - Problems = Inventory at the end

This technique is commonly utilized in the warehouse and retail industries. The overstatement is also known as the Phantom Inventory in this strategy. It is utilized in financial and accounting systems alike. Because this strategy is real-time, salespeople will be able to deliver precise information to either the firm or the customers. It also offers detailed information on which things are selling quickly and which are not. This will allow them to quickly identify problems and sell the items without difficulty. Perpetual inventory is a complex mechanism. Inventory changes are accurate and may be accessed quickly. The perpetual inventory system has no effect on the business process, and it is a type of accounts holding system in which earnings are recorded in real-time, and it also deals with inventory. In the perpetual inventory system, the loss of products included in the closing stockpiles is maintained by a program that keeps all inventories records since hundreds of transactions are made daily.

The ending inventory quantity defines the source of regular inventory data. The permanent inventory method is more expensive since skilled people are required. In a perpetual inventory system, there are no temporary accounts because the items are purchased immediately, and all transactions are recorded directly in the merchandise inventory account. This, in turn, will assist them in understanding client behavior and product interest so that they may profit from it. Because of its numerous benefits, most businesses prefer this strategy for long-term projects. Because it allows them to detect the mistakes right away and they don't have to wait for the transaction to finish. Because of the costs associated with installing and maintaining the infrastructure, this sort of inventory system can be highly expensive. The system is significantly easier to use than the periodic system.

Main Difference Between Periodic Inventory System and Perpetual Inventory System In Points

  1. Perpetual Inventory System refers to an inventory system that records inventory receipts and issues in real-time. At regular periods, the Periodic Inventory System records the specifics of inventory movement.
  2. The Perpetual Inventory System is based on book records, whereas the Periodic Inventory System is based on physical verification.
  3. The records in the Perpetual Inventory System are continually updated, i.e. when stock transactions occur. In the Periodic Inventory System, records are refreshed after a brief period.
  4. The Perpetual Inventory System delivers real-time inventory and cost of sales information, whereas the Periodic Inventory System gives inventory and cost of goods sold information.
  5. The loss of products is reflected in the closure inventory in the Perpetual Inventory System. In the Periodic Inventory System, however, the same is included in the Cost of Goods Sold.
  6. The usual workflow is not disrupted in the Perpetual Inventory System during stock-taking and verification, but the regular business activities may have to be halted in the Periodic Inventory System.

Conclusion

The primary distinction between perpetual and periodic inventory systems is how inventory is priced. A perpetual inventory system is used if the organization employs a system in which the inventory is valued constantly. The Periodic Inventory System is less expensive than the Perpetual Inventory System, but it provides more accurate information due to continuing inventory tracking and timely verification. Furthermore, the financial statements are created promptly since the inventory records are correctly preserved in the Perpetual Inventory System, which is not feasible in the Periodic Inventory System.

The Perpetual Inventory System is best suited for large firms, whereas the Periodic Inventory System is better suited for small businesses. However, it is difficult to discover errors in perpetual inventory. They will utilize any of these strategies based on these parameters. Both are classified as commercial. It will also continue in their advanced studies. Depending on their employment, they will use this strategy in their workplace. The perpetual inventory system is more expensive than the periodic inventory system, but it provides more accurate information due to the timely recording of the account. Although both are necessary, a perpetual inventory system is preferable for large firms and a periodic inventory system is excellent for small enterprises.

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"Difference Between Periodic Inventory System and Perpetual Inventory System." Diffzy.com, 2024. Sat. 24 Feb. 2024. <https://www.diffzy.com/article/difference-between-periodic-inventory-system-and-perpetual-614>.



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