Periodic Inventory vs. Perpetual Inventory: An Overview Inventory refers to any raw materials and finished
goods that companies have on hand for production purposes or that are sold on the market to consumers. Two types of inventory are periodic and perpetual inventory. Both are accounting methods that businesses use to track the number of products they have available. But they are inherently different.
Periodic inventory is one that involves a physical count at various periods of time while perpetual inventory is computerized, using
point-of-sale and enterprise asset management systems. The former is more cost-efficient while the latter takes more time and money to execute. Show
Key Takeaways
Periodic InventoryThe periodic inventory system is often used by smaller businesses that have easy-to-manage inventory and may not have a lot of money or the opportunity to implement computerized systems into their workflow. As such, they use occasional physical counts to measure their inventory and the cost of goods sold (COGS). COGS is an important accounting metric, which, when subtracted from revenue, shows a company's gross margin. The COGS under the periodic inventory system is calculated as follows: COGS = Beginning Balance of Inventory + Cost of Inventory Purchases - Cost of Ending Inventory
Since businesses often carry products in the thousands, performing a physical count can be difficult and time-consuming. Imagine owning an office supply store and trying to count and record every ballpoint pen in stock. Now multiply that for an office supply chain. This is why many companies perform a physical count only once a quarter or even once a year. For companies under a periodic system, this means that the inventory account and cost of goods sold figures are not necessarily very fresh or accurate. The cost of goods sold includes elements like direct labor and materials costs and direct factory overhead costs. Perpetual InventoryThe perpetual inventory system keeps track of inventory balances continuously. This is done through computerized systems using point-of-sale (POS) and enterprise asset management technology that record inventory purchases and sales. It is far more sophisticated than the periodic system of inventory management. Perpetual inventory is a highly detailed system. Changes in inventory are accurate (as long as there is no theft or damage to any goods) and can be easily accessed immediately. The COGS account is also updated continuously as each sale is made. The information collected digitally is sent to central databases in real-time. Because it involves the use of technology, it requires very little effort from businesses (if at all):
This type of inventory system can be very costly because of the cost associated with implementing and maintaining the infrastructure. Using the system is much easier and simpler than the periodic system. Not only does it allow for real-time monitoring, but perpetual inventory is also much more accurate than physical counts. And since each product has a barcode attached, companies can get more detailed information about everything that goes in and out of their warehouses. At a grocery store using the perpetual inventory system, when products with barcodes are swiped and paid for, the system automatically updates inventory levels in a database. Key DifferencesOne of the main differences between these two types of inventory systems involves the companies that use them. Smaller businesses and those with low sales volumes may be better off using the periodic system. In these cases, inventories are small enough that they are easy to manage using manual counts. The perpetual system may be better suited for businesses that have larger, more complex levels of inventory and those with higher sales volumes. For instance, grocery stores or pharmacies tend to use perpetual inventory systems. The technological aspect of the perpetual inventory system has many advantages such as the ability to more easily identify inventory-related errors and can show all transactions comprehensively at the individual unit level. Some of the other main differences between these two types of inventory management are:
Under the perpetual system, managers are able to make the appropriate timing of purchases with a clear knowledge of the number of goods on hand at various locations. Having more accurate tracking of inventory levels also provides a better
way of monitoring problems such as theft. What Is More Effective, Perpetual Inventory or Periodic Inventory?The perpetual system is generally more effective than the periodic inventory system. That's because the computer software companies use makes it a hands-off process that requires little to no effort. Products are barcoded and point-of-sale technology tracks these products from shelf to sale. These barcodes give companies all the information
they need about specific products, including how long they sat on shelves before they were purchased. Perpetual systems also keep accurate records about the cost of goods sold and purchases. Should My Business Use Perpetual Inventory or Periodic Inventory?The nature and type of business you have will factor into the kind of inventory you use. It may make sense to use the periodic system if you have a small business with an easy-to-manage inventory. You can make updates to your accounts manually using this system. If you have a larger company with more complex inventory levels, you may want to consider implementing a perpetual system. The software you introduce into the workflow will make it easier for you to update and maintain your inventory. What Are the Disadvantages of a Periodic Inventory System?There are several disadvantages of using a periodic inventory system. It can be cumbersome and time consuming as it requires you to manually count and record your inventory. And because this is a physical count, there is a higher chance of error. It also isn't as updated as a perpetual system, as it is done at periodic intervals rather than continuously. Does Amazon Use Periodic or Perpetual Inventory?Amazon uses a perpetual inventory system. That's because of the sheer volume of goods that go in and out of its warehouses. What method of inventory valuation does QuickBooks online use quizlet?QuickBooks Online uses the first-in, first-out (FIFO) method of inventory valuation. Because product prices fluctuate, the same product may have a different price each time you purchase it. The FIFO method helps you determine what purchase price to apply when you sell each product.
At what value are inventory items reported on the balance sheet quizlet?Inventory is reported on the balance sheet at: lower of cost or market value.
Where are cash purchases of inventory items recorded?Cash purchases are recorded more directly in the cash flow statement than in the income statement.
Which report summarizes the amount of financial activity associated with each income or expense account for a specific period of time quizlet?An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time.
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