Question

What are the advantages and disadvantages of each of the periodic and perpetual inventory systems? Why?

Answer 1

Periodic inventory system:

A periodic inventory system is an inventory system in which each transaction of purchase and sale is not accounted continuously. The Inventory is updated in records based on physical count of inventory at the end of the period.

Advantages:

· This system is simple compared to perpetual inventory system since each and every transaction is not updated continuously

· It saves time and efforts of management since continuous records need not be maintained

Disadvantages:

· This system will weaken control over inventory since there is no continuous updation of inventory

· Inventory details cannot be gathered on real-time basis since continuous updation is not done

· This system needs physical count to ascertain inventory balance when needed.

Perpetual Inventory system:

A perpetual inventory system is an inventory system where each transaction of purchase and sales are updated on continuous basis. The inventory details are available anytime from the system.

Advantages:

· Inventory details are available continuously online which improves control over inventory

· It helps in working capital management since inventory details are available anytime

· It helps in efficiency and smooth running of the business functions

Disadvantages:

· This system is costly since it needs manpower and additional investments to keep all transactions updated

· This system is not viable for small scale firms since cost of implementation is higher than benefits derived.

Based on advantages and disadvantages of both inventory systems, perpetual inventory system is recommended for firms since it helps in inventory management and implementing good control system over inventory.