What is Perpetual Inventory System?
is the system where an entity continuously updates its inventory records to know the inventory balance instantly. Under this method, an entity added the materials in its inventory records when it is purchased and subtract the materials when goods sold from stock, for an internal transfer from one department to another, for the scrapped item and for other issues. This method is also known as Continuous Inventory taking method.
What is Periodic Inventory System?
Value of Closing stock and the Cost of Goods Sold (COGS) is measured by physical inventory count after a particular period. The inventory account is not updated for each purchase and each sale. Purchase incurred during the period is debited to “Purchase Account” instead of Merchandise Inventory Account.
At the end of the accounting period, the total purchase mentioned in the purchase account is added to the beginning balance of the inventory to compute the Cost of Goods Sold (COGS). The ending inventory is determined by a physical count and subtracted from the cost of goods sold.
Difference Between Perpetual & Periodic Inventory System
The difference between a Perpetual Inventory System and the Periodic Inventory System are enumerated as follows:
| Subject | Perpetual inventory System | Periodic Inventory System |
| Definition | Under Perpetual Inventory System, the inventory records are updated regularly after every transaction is occurred. | Under Periodic Inventory System, the inventory record are updated (usually) at the end of accounting period. |
| Recording | Inventory Software is maintained because hundreds of transactions incurred every day | Most of the cases manually inventory records are maintained. Purchase Register, Sales Register and Inventory Ledger are maintained manually. |
| Determination of Inventory | On the basis of daily inventory record the ending inventory quantity is determined. | On the basis of Physical Stock count ending inventory is determined. |
| Reasons of Stock taking | Inventory counts to confirm whether units are held as per records. | Inventory counts to determine cost of goods sold. |
| Inventory Control | As continuous inventory count occurred, the management always know the quantity of Inventory. | Less Control due to unaware of inventory quantity until the end of the period. |
| Temporary Accounts | No temporary accounts are maintained under perpetual inventory account. Material Purchased directly accounted for as ” Merchandise Inventory Account.” | Temporary Accounts are maintained under Periodic Inventory system. Material purchase Accounted for as ” Purchase Account.” |
| Expensive | As continuous undertaking is needed employee costs is higher than periodic inventory system. | As Inventory counting takes place after particular period, employee cost is lower. |
Accounting Treatment
| Subject | Perpetual Inventory System | Periodic Inventory System |
| When Materials are Purchased | Merchandise Inventory A/c……… Debit Accounts Payable A/c ….. Credit | Purchase A/c ….. Debit Accounts Payable ….Credit |
| When Material is Sold | i) Accounts Receivable A/c …. Debit Sales A/c ………………..Credit ii) Cost of Goods Sold A/c .. Debit Merchandise Inventory A/c … Credit | i) Accounts Receivable A/c … Debit Sales A/c … Credit ii) Merchandise Inventory A/c … Dr Purchase A/c … Credit (Quantity of Merchandise Inventory = Total Inventory less Sold Quantity, and Costs of Merchandise Inventory = Inventory quantity * Purchase Cost per unit) iii) Costs of Goods Sold (COGS) A/c … Debit Purchases A/c …. Credit (COGS = Total Purchase – Ending Balance of Inventory). |