Maintaining the stock account is not an easy task. There may be small as well as large projects. Depending upon the requirement, the company will choose either a periodic or perpetual inventory system.
Both are used by many companies. These two methods are considered the best accounting practices in the market.
Key Takeaways
- Periodic inventory systems require physical inventory counts at regular intervals, while perpetual inventory systems update inventory records continuously as transactions occur.
- Periodic systems are less accurate due to infrequent updates, while perpetual systems provide real-time inventory tracking.
- Perpetual systems are more expensive to implement and maintain but offer better inventory management and control.
Periodic Inventory System vs Perpetual Inventory System
The periodic inventory system is a method of inventory management where physical counts of inventory are taken at regular intervals, while the perpetual inventory system is a method of inventory management where inventory levels are tracked in real-time using software or other tools.
The periodic Inventory System does not record the transaction at the unit level, so it will become tedious to find the errors. It does not show the stock turnover rate. It will only allow us to record the goods that are sold at certain intervals and certain periods of time.
The perpetual inventory system is one of the most common accounting methods used by many companies for moving larger stocks because of its huge advantages.
Since this method consistently updates all the stock-related services, it will be easy for the company to track the changes. But one disadvantage is that theft can happen easily.
Comparison Table
| Parameters of Comparison | Periodic Inventory System | Perpetual Inventory System |
|---|---|---|
| Definition | It used to record in real-time | It used to record at particular intervals |
| Advantages | All accounting will be recorded in a single purchase | We don’t need a huge investment. We can invest with fewer materials |
| Disadvantages | All processes will happen slowly | During the transaction, theft can easily happen |
| Sales and Transaction | It records the sale transaction in a single manner | Both sales transactions and the cost of the goods will be recorded together |
| Purchase | Purchases will be recorded as a lump sum | Purchases will be recorded only in the relevant accounts. |
What is Periodic Inventory System?
In a periodic inventory system, at some specific levels, a physical count of the inventory will be performed. This method is used to count the physical stock, which in turn will determine the cost of goods sold.
It would be better if you use it for small stocks as it requires physical entry, so that human errors can be possible.
In this system, any number of purchases can be made, but stocky purchasing will not be done many times. Only a few stocks will be purchased in this time period. There will be some disadvantages as well in the periodic inventory system.
At the end of the year, the physical counting of stock records will be done so that the records will be adjusted and it will be updated according to that.
The number of goods sold in the report can also include lost goods or theft during that period. The periodic inventory system is updated only on a physical stock take.
This method uses a single-entry take. So that whenever goods get sold, the amount will be reflected right after that.
What is Perpetual Inventory System?
The perpetual Inventory system evaluates the inventory changes in real-time and doesn’t require physical inventory for recording purposes. It will show the real stock accurately. It uses two devices called Point of Sale System and Scanners.
This method is mostly used in the warehouse and retail industry. In this method, the overstatement is also called the Phantom Inventory.
It will be preferred by most companies where material planning requirement production is used. It has a strong ability to interact with other business sectors. It is used in both financial and accounting systems.
Since this method uses real-time, it will be easy for salespeople to provide accurate information either for the company or the customers. It also provides precise information on what are all the goods are fast selling and what is not selling.
This will help them to find the errors easily and make the products sell fast without any hassles.
This, in turn, will help them to understand the behaviour of the customers and their interest in products so that they will use that for their profit. Since it has many advantages, most companies prefer this method for their long-term projects.
Since it allows them to find the errors at first, and they don’t have to wait for the transaction to completely take place.
Main Differences Between Periodic Inventory System and Perpetual Inventory System
- The periodic inventory system uses physical entries, while the perpetual inventory system uses the book recording method to maintain the purchases and entries.
- It is difficult to find the error as the transactions are not provided in the correct format. But in a perpetual inventory system, it can be identified at first.
- In a periodic inventory system, it calculates the stock purchase by the end, but in a perpetual inventory system, the stock purchase can be calculated at any time.
- In periodic inventory, the accounts will be updated only when there is a physical stock, but on a perpetual inventory system, the accounts will be updated continuously.
- In periodic inventory, it will calculate the stock per unit, but the perpetual inventory system can calculate it at any time due to the real-time data.
- http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.baztech-b7f240a2-b12f-4900-a772-ac65acdaf1bf
- https://www.nber.org/system/files/chapters/c9716/c9716.pdf
Last Updated : 17 July, 2023
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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.
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