Question

Explain the difference between perpetual and periodic inventory systems. What types of businesses would use each system and what are the advantages and disadvantage of each.

Answer 1

S No.	Perpetual System	Periodic System
1	Under perpetual system track of inventory balances is held continuously and updates made in real-time whenever a product is received or sold.	Under Periodic inventory system occasional physical count is carried out to measure the level of inventory and the cost of goods sold (COGS).
2	Book records are maintained and updated on real-time basis	Basis of inventory is physical verification
3	Continuous updation are made in inventory records	Continuous updations are not made and only made at the end of the accounting period
4	Contained information about inventory and cost of sales	Contains information about inventory and cost of goods sold
5	Inventory control is possible	Inventory control is not possible
6	Inventory at the Beginning + Receipts – Issues = Inventory at the end	Inventory at the Beginning + Purchases – Inventory at the end = Cost of Goods Sold

Suitability for business types:

The Perpetual Inventory System is best suited for big enterprises or where the amount of inventory is too large while small businesses can go for Periodic Inventory System which involves small amount of inventory. This is because periodic system is a costly affair and a time consuming continuous process which may not be suitable for small businesses to undertake.

Advantages and disadvantages:

Perpetual System:

Advantages:

1. Detailed information about inventory is available

2. Real time and accurate information about inventory

3. Continuous updates provide fast information about low level of stock and replenishment can be suitably planned

4. Better inventory control

Disadvantages:

1. Costly system and may require investments in the form of barcode scanner, Computer software etc.

2. Time consuming and continuous process.

Periodic System:

Advantages:

1. Less costly and no major investment required

2. No technical expertise required

3. Simple way of record keeping

Disadvantages:

1. It may involve disruption of normal business during physical count of inventories

2. Risk of errors is too high

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