Periodic vs. Perpetual Inventory
Posted in business, accounting, warehousing, inventory
Before getting ready to sell goods, every entrepreneur should decide for himself what system of inventory his business will be using. Companies may use either the perpetual system or the periodic system to account for inventory.
The choice of the system should be fixed in the company’s accounting policy. Workflow organization, content and frequency of various internal reports, selection of accounting and inventory management software - it all depends on this significant choice.
Periodic inventory system keeps the inventory balance at the same value that it was at the beginning of the accounting period. At the end of period, the inventory balance is adjusted to a physical count.
Under the periodic system, merchandise purchases are recorded in the purchases account, and the inventory account balance is updated only at the end of each accounting period. Thus cost of goods sold account does not exist during the accounting period. The inventory account balance remains unchanged until another physical count is made.
As the inventory account in a periodic inventory system keeps its beginning balance until the end of period, a separate cost of goods sold calculation is necessary. It is determined at the end of accounting period via a closing entry. This operation will update stock accounts balances and subsequently make cost of goods sold value.
The disadvantage of this system is that accounting balances reflect the actual financial situation only when the physical inventory is made. Throughout the period between physical inventories, accounting data does not reflect the actual stocks of the business. Therefore, this system is not suitable for daily financial reports.
In perpetual inventory system, unlike periodic inventory, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction.
All purchases are booked on an inventory account. By using perpetual inventory system, the cost of goods sold is defined as the sum of all stock expenses for the period. Current stock balance is available at any time in this case.
PayTraq supports both systems of inventory. System of inventory can be changed in the company's profile.
In case of periodic inventory, all purchases are booked on expenses. Stock balance will be updated when the actual cost calculation is made.
In case of perpetual inventory, the standard cost should be defined for every stockable item. Standard cost is a planned cost that will be used in journal entries for all sales. Stock balance will be adjusted to the difference between actual and standard cost when the actual cost calculation is made.
Since PayTraq supports both inventory systems, the choice depends on the unique specifics of business activity and requirements of financial reports.