Periodic inventory system is an inventory system that values inventory on a periodic basis on regular intervals, generally on a monthly, quarterly or an annual basis. Perpetual inventory system is a method of accounting for the increase or decrease in inventory immediately following a sale or purchase. XYZ Company uses a perpetual inventory system and records each purchase and sale as it occurs for the month of April 2017 At the year end, the perpetual system will compare the physical inventory balance with the accounting records to investigate whether there are any inconsistencies.Į.g. This is vital since inventory is one of the most significant current assets and ratios such as the inventory turnover ratio should be calculated for working capital management decision making. Further, since inventory levels are updated on a real time basis, the balance in the inventory account and the cost of goods sold account remains correct throughout the accounting year. The main advantage of perpetual inventory system is that it demonstrates how much inventory is available at any given point of time and prevents stock outs. This system keeps continuous track of inventory balances and provides complete details of changes in inventory through immediate reporting. Summary What is a Perpetual Inventory System?Ī perpetual inventory system is a method of accounting for the increase or decrease in inventory immediately following a sale or purchase. Side by Side Comparison – Perpetual vs Periodic Inventory Systemĥ. The key difference between perpetual and periodic inventory system is that perpetual inventory system is a method of accounting for the increase or decrease in inventory immediately following a sale or purchase whereas periodic inventory system values inventory on a periodic basis on regular intervals, generally on a monthly, quarterly or an annual basis.Ĥ. The objective of both perpetual and periodic inventory systems is to determine the ending inventory balance and the cost of goods sold. Having an effective inventory system is essential for companies that operate with a significant level of inventory. Key Difference – Perpetual vs Periodic Inventory System
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