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Perpetual Versus Periodic Inventory System: What is The Difference?

Are you trying to decide between a perpetual vs. periodic inventory system, but you’re not sure which one is right for your business?

These systems are accounting methods that allow you to keep track of the number of products you have available. Even in well-run companies, around 20 to 30 percent of inventory is obsolete or dead. 

The right inventory management system can help you cut down on wasted inventory, making your business more profitable in the long run. Whether you’re keeping track of food products or clothing, an inventory system will help ensure that none of your products go to waste. 

But how do you decide between a perpetual or periodic inventory system? Check out this guide to learn about the differences between these two systems and how to figure out which inventory system is right for your business. 

Related: Mastering the Production Schedule

What is Perpetual Inventory?

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With a perpetual inventory system, you instantaneously track products through an integrated point-of sales-system when you make a sale. 

Whenever you sell or receive a product, the system automatically updates itself, so you don’t have to wait until the end of the accounting period to track your inventory. As long as products aren’t stolen or damaged, your inventory account balance should be accurate.

With a perpetual inventory system, each item gets a radiofrequency ID tag, barcode, and serial number to indicate the origin of the product. This allows you to figure out the purchase order that each item came from, how long it has been on the shelf and the costs associated with storing an item for a certain time period. 

Therefore, when you sell each item, you can calculate exactly how much that item costs you. This allows for more accuracy when it comes to your gross margin and the cost of goods sold. 

In turn, this provides you with a more accurate picture of where your business stands financially. 

What is Periodic Inventory?

Periodic Inventory Management

The alternative to a periodic inventory system is a perpetual inventory system. With a periodic inventory system, you physically count your inventory periodically (hence, the name). 

You may choose to count your inventory once per month, once every quarter, or once a year. With this type of inventory system, you’ll record your merchandise purchases in a purchases account. 

At the end of each set period, you’ll update your inventory account, and your cost of goods sold account. You’ll then subtract the cost of goods sold from your total revenue to figure out your gross profit margin for each period. 

If you maintain a small inventory and only stock a few sellable products, tallying your products and calculating how many items you’ve sold should only take a few hours. However, if your business has thousands of products, tracking your inventory by hand can be time-consuming and difficult. 

Are you looking for a more efficient way to keep your inventory organized? Click here to learn how to color-code and organize your products. 

Perpetual vs. Periodic Inventory: How to Choose?

So, how do you know which inventory system is right for you? Let’s look at the main differences between each system to help you decide:

Business Size 

When choosing between a perpetual and periodic inventory system, one of the main things you need to consider your business’s size

Generally speaking, periodic systems are better for small businesses, as perpetual inventory systems are expensive to set up and operate. If you run an art gallery, car dealership, medical device company, or any other type of business with low monthly sales, then a periodic system is likely better, as it’s easy to track your inventory manually. 

However, if you run multiple retail outlets with high sales volumes (such as a pharmacy or grocery store), then a perpetual inventory system is likely better for you.

Computer Systems

With a perpetual inventory system, there is no way to maintain records manually. This is because there may be thousands of transactions for every inventory period. 

With a periodic inventory system, you can keep manual records for small inventories. Many business owners prefer this simplified method of inventory tracking. 

Cost of Goods Sold

As each sale is made, the perpetual inventory system continuously updates the cost of goods sold account. 

With a periodic inventory system, the system calculates the cost of goods sold in a lump sum at the end of each accounting period. It does this by calculating the total number of purchases at the beginning of the inventory and subtracting it from the ending inventory. This can make it difficult to figure out the exact cost of goods sold before the end of the accounting period. 

Related: Calculating Total Manufacturing Cost: What You Need to Know 

Transaction Investigations

With a periodic inventory system, it’s virtually impossible to figure out why any inventory-related error occurred

However, with a perpetual inventory system, it’s much easier to determine why certain errors occurred. This is because all transaction details are available at an individual level with this type of system. Periodic systems, on the other hand, only have this information available at a very high level. 

Related: Identifying and Avoiding QC Issues 

Purchases

With a perpetual inventory system, you record purchases in a merchandise account or raw materials inventory account. For each inventory item, there is also a unit-count entry put into the record. 

With a periodic inventory system, on the other hand, you record all purchases in a purchase asset account. There are no individual records to keep track of or unit count information that you can add. 

Are you looking to take better control of your inventory? Click here to learn the top inventory management tips. 

Which System Will You Choose? 

Now that you understand the difference between a perpetual inventory system and a periodic inventory system, it’s time for you to decide which system is right for you. 

As you can see, each system comes with its own unique set of advantages and disadvantages, and which system you choose will largely depend on the size of your business as well as the size of your inventory. 

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