What is the Difference Between Perpetual Inventory Systems and Periodic Inventory Systems?

The biggest difference between perpetual inventory systems and periodic inventory systems is the former provides real-time updates, but the latter only estimates current stock levels. Perpetual inventory systems are more costly, but more effective. Periodic inventory systems may only use staff time and an Excel spreadsheet. These two methods of calculating inventory offer separate advantages and disadvantages to businesses.

Periodic Inventory Systems

Periodic inventory systems are a traditional method of tracking stock that dates back to antiquity. In short, this non-continuous process relies on manually tracking sold items. Employees will count the number of items sold against the number of items listed in the previous inventory check. Depending on the business owner’s preference, inventory checks may occur every week, month or year.

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Periodic inventory systems have minimal start-up costs because inventory checks can be completed with traditional pen and paper. The greatest challenge of this system is that collective and coordinated efforts are required to maintain accurate inventory levels. Periodic inventory systems lack visibility of exactly how many items are in stock at any given time and inventory checks consume a lot of time and effort. All sales of goods must be recorded directly in the inventory log as they occur, so this continuous record of inventory changes increases the likelihood of human errors.

Perpetual Inventory Systems

Perpetual inventory systems are becoming the most popular choice for businesses because they offer the best value-added benefits. These systems rely on integrated technology solutions to accurately track business transactions in real-time. Most transactions start when a cashier scans a product over a register’s digital scanner, which sends information directly to a centralized inventory information management system. This software will automatically deduct sold or add returned items into the inventory.

These software solutions not only provide details about inventory, they can be programmed to automatically re-order inventory items that are low from vendors. Once the software is fully operational and employees are fully trained, this system drastically reduces human errors and produces highly accurate data. The drawback to a perpetual inventory system is the expensive startup cost. These systems require multiple scanners, software and computers to work correctly. All products must have bar codes placed on each product for this inventory system to properly function.

Accounting Differences

Perpetual inventory software systems automatically debit merchandise or material purchases to inventory sections instead of purchase sections. Accounting allowances, freight-in, returns and discounts are documented in inventory instead of separate tracking accounts. Perpetual inventory systems recognize the cost of goods sold for each sale by debiting the expense and crediting inventory. Inventory is featured in a master control account that is supported by subsidiary accounts of individual inventory records that show the cost and quantity.

Periodic inventory software systems record all inventory acquisitions as debits to a purchase account. This account total is added to the cost of the inventory on hand to determine the total cost of the goods. Inventory levels are subtracted from the cost of goods to calculate the cost of goods that have been sold. The physical inventory count required by these systems can be done once a year, but almost all businesses use quarterly inventory checks.

The ultimate difference between perpetual inventory systems and periodic inventory systems comes down to how and when items are taken in and out of inventory. Regardless of the inventory method, a periodic system will help employees to verify stock levels, investigate issues and reconcile any differences.