Question

The periodic and the perpetual inventory systems are two methods that companies use to account for inventories. Briefly describe the major features of each system and explain why a physical inventory is necessary under both systems.

Answer 1

1. Periodic Inventory System:-

• In Periodic inventory system, stock is updated periodically i.e. over a specific time as decided by the management.

* Features:

- As it is periodically entered, there is no regular updation of inventory.

- Important feature of this meathod is, at the end of the year closing stock is obtained by physical verification of the inventory.

- Opening stock and purchases are debited to Cost of sales account.

2. Perpetual Inventory System:

• In perpetual inventory system, inventory is continously updated through computer inventory softwares.

* Features:-

- As the inventory is updated through softwares, it helps business to keep real time inventory.

-As it is managed by software, it prevents item to become out of stock.

-It helps in understanding customers preferances.

- It reduces physical count of inventory as it is automatically updated.

● Physical inventory is necessary umder both system because periodic system uses physical verification of inventory and Perpetual system keeps the record through software of the inventory actually present.