Perpetual Inventory System: Definition, Benefits & How It Works

The perpetual inventory system involves tracking and updating inventory records after every transaction of goods received or sold through the use of technology. In perpetual inventory systems, a sale of a stock item increases cost of goods sold (COGS)Cost of Goods Sold (COGS)Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct and also is updated in accounting records to ensure that the number of goods in a store or in storage is accurately reflected in the inventory account.

The perpetual inventory system is a more robust system than the periodic inventory systemPeriodic Inventory SystemThe periodic inventory system refers to conducting a physical inventory of goods/products on a scheduled basis. Maintaining physical, which is where a company undertakes  regular audits of stock to update inventory information.  These audits include regular physical inventory counts on a scheduled and periodic basis. The major difference between perpetual and periodic inventory systems is that the former has a system that updates inventory information in real-time while the latter uses a more manual process.

Increased Usage of a Perpetual Inventory System

Perpetual inventory systems in the past were not widely used, as it was difficult to record and process the large amounts of data quickly and accurately.

In recent years, however, the technology capability has increased and has improved business and accounting practices, inventory tracking systems can now be managed through the use of computers and scanners, perpetual inventory tracking has become less burdensome.

Perpetual vs. Periodic Inventory Systems

Most small and medium-sized companies use the periodic inventory system, which involves scheduled inventory auditsAuditingAuditing typically refers to financial statement audits or an objective examination and evaluation of a company’s financial statements – throughout every year. In most cases, periodic inventory counts are conducted a few times per year or even at the end of every month.

The primary issue that companies face under the periodic inventory system is the fact that inventory information is not up to date, and may be unreliable.  . This means that managers don’t have accurate demand forecasts or inventory levels to ensure that stockouts don’t occur.

Perpetual inventories are the solution to such an issue, giving accurate and updated information about inventory levels, COGS, allows them to check on discrepancies in real-time.

Related Readings

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• Day Sales in Inventory (DSI)Days Sales in Inventory (DSI)Days Sales in Inventory (DSI), sometimes known as inventory days or days in inventory, is a measurement of the average number of days or time
• Inventory AuditAuditing InventoryAuditing inventory is the process of cross-checking financial records with physical inventory and records. It can be completed by auditors and other
• LIFO vs. FIFOLIFO vs. FIFOAmid the ongoing LIFO vs. FIFO debate in accounting, deciding which method to use is not always easy. LIFO and FIFO are the two most common techniques used in valuing the cost of goods sold and inventory.
• Weighted Average Cost MethodWeighted Average Cost MethodThe weighted average cost (WAC) method of inventory valuation uses a weighted average to determine the amount that goes into COGS and inventory. The weighted average cost method divides the cost of goods available for sale by the number of units available for sale. The WAC method is permitted under both GAAP and IFRS.