When it comes to running and sustaining a business, inventory is a vital part of the overall equation. It refers to the list of items, parts, and raw materials a company sells and uses and pertains to the act of counting or listing items. As a business leader, you must set inventory management in place to ensure enough stock and avoid shortage. It is also instrumental in achieving robust accounting and financial success.
In this article, we’ll specifically tackle the difference between periodic and perpetual inventory systems. Keep on reading to learn what key factors to consider when deciding to use between the two approaches.
Periodic vs. perpetual inventory system
Let’s first look at the two basic types of inventory systems. Take note of the following details:
Periodic inventory system: This system is an inventory where the bookkeeper manually counts the stock periodically. The frequency of this process will depend on your business, whether it is quarterly, semi-annually, or annually. However, it isn’t recorded or performed in a transaction-by-transaction method due to cost, time, and labour factors.
Perpetual inventory system: As the name suggests, this system requires the continuous recording and tracking of your goods or items. Every time you add items to your stock or sell some to your customers, they are automatically entered into the bookkeeping system. The same is true when your customers return the products.
As an online accounting firm, our experts can help your business from many aspects. Apart from strict bookkeeping and accounting, we also offer services such as goal setting and monitoring, structuring advice, and decision-making support. To set your inventory system in place, whether it is periodic or perpetual, we’ve got you covered!
Key factors to consider for your inventory system
If you’re having a hard time deciding between the two inventory systems, below are key factors to consider:
Bookkeeping: As far as recording is concerned, periodic inventory is done physically without the aid of a computer on a certain timeframe. On the other hand, perpetual inventory is when items are recorded continuously through digital technology.
Purchase tracking: While a periodic inventory records only one entry for the entire stock in the asset account, the perpetual inventory keeps a record of the entire stock regularly with item-based documentation and reflected in the finished stock account.
Sales documentation: When it comes to sold products, the periodic inventory only has a single entry showing the sales amount. On the contrary, the perpetual inventory records two key entries—the sales amount and the cost of the goods sold.
Closing entries: For a periodic inventory, you have to make closing entries to get the total cost of the sold goods and compute for the stock on hand. But this doesn’t apply to a perpetual inventory, as everything is updated consistently.
Checking transactions: For a perpetual inventory, it is easy for you to check the accuracy of all transactions and see where the discrepancy lies. However, this isn’t possible for periodic inventory as you may lose data and information if it isn’t checked regularly.
At this point, you now know that inventory is a vital aspect and pre-requisite for any business in selling goods and finished products. When choosing between the two inventory systems shared above, you must remember to consider the key factors we discussed—bookkeeping, purchase tracking, sales documentation, closing entries, and checking transactions. With all these in mind, you’ll be able to pick the right inventory system that will work for your business and bring in financial success!
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