Inventory Management is the ability to track goods or materials. It is essential to the health of any business. Accurate information about inventory helps managers reduce waste, meet customers’ expectations, and anticipate future demand. It is a critical part of maximising profit for a company.
What is the perpetual inventory system?
Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as:
- Received inventory items
- Goods sold from stock
- Items moved from one location to another
- Items picked from inventory for use in the production process
- Items scrapped
Thus, a perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced level of physical inventory counts.
The inventory is recorded through the use of computerised point-of-sale systems and asset management software. Usually each perpetual system will be industry specific e.g. panel-beaters, clothing boutique, chemical manufacturers etc. The data not only updates the changes in value of stock but also changes in volume.
It is possible that a company will use the periodic system in its general ledger and use a different computer system outside of its general ledger to track the flow of goods in and out of inventory.
In recent years, advances in inventory management software and the ability to integrate it with other business systems have made perpetual inventory a more practical and powerful option for many businesses. Additionally, cloud-based inventory management systems are often real time, a key element of a perpetual inventory system.
Inventory management software relies heavily on automation, particularly the use of bar code scanners, for real-time updates. Automation removes some of the potential for human error, typos, and overlap so the business has a more accurate picture of inventory at any moment.
What is the periodic inventory system?
In a periodic system the “inventory” account will:
- Have a constant balance (the ending balance from the previous period)
- Not include the cost of purchases (they are recorded in the Purchases account)
- Be adjusted at the end of the accounting period (so the balance reports the costs actually in inventory)
- Require a physical count of inventory (stock-take) at least once a year (and estimates during the year).
Is there a difference between the accounts Purchases and Inventory?
- The account Purchases is generally associated with the purchase of inventory items under the periodic inventory system. Under the periodic system the account Inventory (Closing stock) is dormant until it is adjusted to the cost of the ending inventory at the end of an accounting period.Under the perpetual inventory system, the account Purchases won’t exist. Rather, the cost of inventory items purchased will be recorded directly into the account Inventory (Cost of Goods Sold).Under the periodic system, the cost in the account Purchases will be added to the cost of the beginning inventory to arrive at the cost of goods available. The cost of the ending inventory is computed through a physical count (or an estimate) and is subtracted from the cost of goods available. The resulting amount is the cost of goods sold.Under the perpetual system, the balance in the account Inventory should be the cost of the ending inventory. Under the perpetual system, the cost of goods sold will have been removed from the account Inventory when the items were sold and placed in the account Cost of Goods Sold.
Pros and Cons
Perpetual system generally more expensive to maintain but provides more accurate and up-to-date information. A physical count of stock is still required from time to time to correct any errors; to show possible thefts not detected or losses of stock not recorded. This system achieves control over expensive goods.
Periodic system is easier to maintain. No need to purchase expensive software, just use an excel spreadsheet. The main flaw of this system is that you never have an accurate inventory count until a physical count is done. And the physical count is labour intensive. Harder to gauge the level of theft.
Contact our business advisors if require on-site implementation assistance, training, support or just a general helping with inventory management systems such as MYOB, Vend and Unleashed.