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Perpetual Inventory System

Tracking inventory after every or almost every major purchase

What is the Perpetual Inventory System?

The perpetual inventory system involves tracking inventory after every or almost every major purchase. In perpetual inventory systems, the cost of goods sold (COGS) is updated in accounting records to ensure that the number of goods in a store or in storage is accurately reflected by the books.

 

Perpetual Inventory System

 

The perpetual inventory system is the opposite of the periodic inventory system, where a company maintains its inventory through physical counts on a definite scheduled and reoccurring basis. The major difference between perpetual and periodic inventory systems is that the former is done in real time while the latter shows the COGS in-between physical inventories.

 

Increased Usage of a Perpetual Inventory System

Perpetual inventory systems are not widely used by major companies because they are time-consuming and take time away from employees who may otherwise be actively engaging in sales.

In recent years, however, as technology begins to take over every part of business and accounting practices and inventory can be calculated through the use of computers and scanners, perpetual inventory systems are becoming less burdensome.

 

Perpetual vs. Periodic Inventory Systems

Most companies nowadays use the periodic inventory system, which involves scheduled inventory checks throughout every year. In most cases, periodic inventories are conducted a few times per year or even every month.

The primary issue that companies face under such the periodic inventory system is the fact that there is a lapse in updated inventory information and accounting for COGS between inventories. It means that managers and higher-level executives only receive periodic updates on the state of a company’s inventory and earnings.

Perpetual inventories are the solution to such an issue, giving accurate and updated information about inventory, COGS, and earnings continuously in real time.

The primary benefit of a perpetual inventory system is that it provides managers, executives, and investors with pertinent statistics on the state of the company on a timelier basis. It, in turn, enables them to make positive moves for growth and to catch any issues before they become exaggerated.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Day Sales in Inventory (DSI)
  • Inventory Audit
  • LIFO vs. FIFO
  • Weighted Average Cost Method

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