It is a common practice for manufacturers and other businesses to keep track of inventory. This includes maintaining records of purchases, returns, and other processes.
For this purpose, several inventory record systems can be used. Periodic and perpetual are two such systems designed for efficient and easy recording.
- Periodic means something that occurs or repeats regularly, while perpetual means something that never ends or ceases.
- Periodic events have a fixed duration or cycle, while perpetual events continue indefinitely.
- Periodic events can be predicted or planned, while perpetual events cannot.
Periodic vs Perpetual
The periodic inventory system is an inventory valuation where records are updated on a scheduled basis. The cost of sales and inventory status are determined. The perpetual inventory system is an inventory valuation system that continuously updates an inventory book. The cost of goods sold and inventory status is determined.
As the name suggests, the periodic inventory system only requires updating on a periodic basis. This is generally done either once or twice.
Most manufacturers choose to update the records at the end of the year. The process involves counting the stock present in the inventory physically.
Then, the costs and expenditures are calculated.
Meanwhile, a perpetual inventory system requires records to be always up to date. This means that every time there is a movement in the inventory, it is recorded.
Therefore, there is no need to calculate the costs at the end of the year physically. Moreover, it allows the book inventory to be similar to the real inventory.
|Parameters of Comparison||Periodic||Perpetual|
|Meaning||It is an inventory system in which records are updated periodically.||It is an inventory system in which records are updated continuously.|
|Method||It involves checking the inventory and counting stock physically.||It involves maintaining a book of inventory.|
|Calculations||It calculates the status of inventory and the cost of sales.||It calculates the status of inventory and the cost of goods sold.|
|Control||It allows a possibility of controlling the inventory.||It does not allow a possibility of controlling the inventory.|
|Evaluation||It does not require the business to stop during evaluation.||It requires the business to stop during evaluation.|
|Balance Sheet||The balance sheet represents the inventory.||The balance sheet represents the cost of goods sold.|
What is Periodic?
The periodic inventory system is essentially a method designed to keep track of inventory. As the name suggests, the inventory is checked only periodically.
This may be done once a year, in the end, or twice annually. The process involves checking the inventory and stock physically.
Further, the status of inventory and cost of sales is calculated.
While doing so, there is no need for the business to stop.
\This is because the records are taken once instead of continuously.
So, the business can keep running, and the movement during the evaluation can be calculated in the next update. This also allows the owner a possibility of control over the inventory.
Once the evaluation takes place, a balance sheet is made, which represents the inventory. The entire process is relatively cost-effective and efficient as compared to other methods.
This is because there is no need to maintain a book or keep checking the inventory every day.
However, the periodic inventory system also has its limitations. Firstly, there is very little information about the flow of stock, which can cause errors in estimation.
Moreover, the evaluation requires large adjustments at once, which can be quite difficult. Larger companies are, therefore, at a disadvantage using this system.
What is Perpetual?
The perpetual inventory system is another method devised to keep track of the inventory.
However, unlike the periodic system, the perpetual system involves maintaining a book to keep track of the movement of inventory continuously.
This means that every purchase, sale, or return is entered into the book at the time that it happens.
There is no need to check the inventory physically for this purpose. Using the book entries, the inventory status and the cost of goods sold can be calculated.
In doing so, a balance sheet is made, which only represents the cost of goods sold. Due to this, there is very little scope of control over the inventory.
The entire process may not be as cost-effective as the former. This is because a book must be maintained throughout the year while the inventory is kept in check.
The task can also get arduous and very time-consuming.
However, larger companies are better off using this system. It allows active surveillance of inventory throughout the year, easy management, and even potential for predictive analysis.
Smaller companies, on the other hand, who may not be able to maintain books and continuously check the inventory, must not use this system.
Main Differences Between Periodic and Perpetual
- Periodic is an inventory system in which records are updated periodically, whereas perpetual is an inventory system in which records are updated continuously.
- Periodic involves checking the inventory and counting stock physically, whereas perpetual involves maintaining a book of inventory.
- Periodic calculates the status of inventory and cost of sales, whereas perpetual calculates the status of inventory and cost of goods sold.
- Periodic allows the possibility of controlling the inventory, whereas perpetual does not allow the possibility of controlling the inventory.
- Periodic does not require for the business to stop during evaluation, whereas perpetual requires for the business to stop during evaluation.
- In the case of periodic, the balance sheet represents the inventory, whereas, in the case of perpetual, the balance sheet represents the cost of goods sold.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.