Inventory management can be a daunting task for any business, whether it’s small or large. And the decision to use a perpetual or periodic inventory system is one of the most critical choices that must be made. Both systems have their benefits and drawbacks.
A perpetual inventory system is a continuous and real-time updating of inventory records to reflect inventory levels, costs, and sales. Whereas a periodic inventory system is the inventory records that are updated periodically, usually at the end of an accounting period, based on physical inventory counts.
Perpetual vs. Periodic Inventory Systems
|Perpetual Inventory System||Periodic Inventory System|
|The Perpetual Inventory System continuously updates inventory records to reflect each transaction in real-time.||The Periodic Inventory System does not provide real-time updates, as inventory records are updated periodically, usually at the end of an accounting period based on physical inventory counts.|
|This system provides real-time visibility into inventory levels, costs, and sales throughout the accounting period.||This system does not provide real-time visibility into inventory levels, costs, and sales, as updates are made only periodically.|
|In the Perpetual Inventory System, the COGS is calculated continuously and reflects the most current cost of inventory.||In the Periodic Inventory System, the COGS is calculated based on periodic physical inventory counts and may not accurately reflect the actual cost of inventory during the accounting period.|
|This system may not require physical inventory counts as inventory records are updated in real-time.||This system requires physical inventory counts at the end of each accounting period to update inventory records.|
|The Perpetual Inventory System allows for better inventory control, monitoring, and reconciliation due to real-time updates.||The Periodic Inventory System may result in inventory discrepancies and challenges in identifying and addressing inventory issues in real-time.|
|This system requires detailed and accurate record-keeping of inventory transactions due to real-time updates.||This system requires record-keeping of physical inventory counts and adjustments made at the end of each accounting period.|
Advantages of the perpetual and periodic system
There are many advantages to using a perpetual inventory system over a periodic one. Perhaps the most obvious advantage is that you are always aware of your stock levels. This means that you can avoid stockouts and keep track of your inventory levels more easily.
Another advantage is that it is easier to track changes in your inventory levels. This can be helpful in identifying theft or other issues.
Perpetual inventory systems can also be more accurate than periodic ones, as they take into account all sales and purchases immediately. This can give you a more accurate picture of your business’s finances.
The periodic inventory system has the advantage that it is much simpler to implement and maintain. With a perpetual inventory system, however, businesses have to constantly update their records to reflect changes in inventory levels. This can be very time-consuming and expensive.
Drawbacks of the perpetual system
Perpetual inventory systems have several drawbacks. First, they are more expensive to maintain than periodic inventory systems. This is because perpetual inventory systems require more frequent updates and maintenance.
Second, perpetual inventory systems are more susceptible to errors. This is because there are more opportunities for data entry errors when updating the system more frequently.
Third, perpetual inventory systems can be less accurate than periodic inventory systems within the duration of the update. This is because they do not take into account changes in inventory levels that occur between updates.
Drawbacks of the periodic system
There are a few drawbacks to using a periodic inventory system. First, it can be difficult to keep track of inventory levels since they are only checked and updated at specific intervals. This can lead to either overstocking or understocking of items, both of which can be costly.
Secondly, the periodic inventory system does not give real-time information about what is in stock. This can make it hard to make quick decisions about production or restocking needs.
Examples of each inventory system in action
Which type of inventory system is best for your business depends on a number of factors, including the size and complexity of your business, the frequency of your inventory turnover, and the accuracy of your records.
Here are some examples of each type of inventory system in action:
Perpetual Inventory System:
A perpetual inventory system is typically used by businesses with large inventories that turn over quickly. This system allows businesses to have a more accurate picture of their current inventory levels, so they can make better decisions about ordering and stocking products.
Periodic Inventory System:
A periodic inventory system is typically used by businesses with smaller inventories that don’t turn over as quickly. This system is less expensive to maintain, but it can be less accurate than a perpetual system.
Key differences between perpetual and periodic inventory systems
Perpetual inventory systems are real-time, meaning that as soon as a sale is made or product is received, the inventory system is updated. This provides an always accurate view of what’s in stock. Periodic inventory systems, on the other hand, are not real-time. Inventories are only updated at set intervals, such as monthly or quarterly.
Perpetual inventory systems tend to be more expensive to set up and maintain, but they provide more accurate data. Periodic inventory systems are less expensive and easier to maintain, but they don’t provide as much information about what’s in stock.
Which type of system is right for you depends on your needs. If you have a small business with limited inventory, a periodic system may be sufficient. If you have a large business with complex inventory needs, a perpetual system may be necessary.
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How to choose the right inventory system for your business
There are many different factors to consider, such as the size of your business, the type of products you sell, and your budget.
When choosing an inventory system, the first thing you need to do is assess your needs. What type of products do you sell? How often do they need to be replenished? How many SKUs do you have? Answering these questions will help you narrow down your options and choose a system that’s right for your business.
Next, you need to consider your budget. Inventory systems can range in price from a few hundred dollars to tens of thousands of dollars. Choose a system that fits within your budget and offers the features you need.
Finally, take some time to research different inventory systems. Talk to other businesses in your industry and see what they’re using. Ask for recommendations from friends or family members who own businesses. Once you’ve narrowed down your choices, take some time to read online reviews. This will give you a good idea of what others think about the different systems available.
By following these steps, you’ll be able to choose the right inventory system for your business and keep your costs under control.
In conclusion, a perpetual inventory system is an invaluable tool for businesses to track the stock levels of their products and make sure that they have sufficient supplies. This type of system helps them stay on top of their inventory, making it easier to manage and reducing the risk of being out-of-stock or overstocked. On the other hand, periodic inventory systems can be useful when you are looking for more detailed information regarding your current stock levels or want to do a physical count. Both systems offer advantages and disadvantages depending on what you need from them so choose accordingly.