Question

describe the difference between periodic and perpetual inventory systems. Explain in detail

Answer 1

Under the perpetual inventory system, the updation of inventory records is done on a continuous basis. The inventory movements are recorded almost real-time wherein the inventory records are updated as and when a purchase or sale takes place and is recorded. The perpetual inventory system thus reflects the current up-to-date inventory.

Under the periodic inventory system, the inventory records are updated on a periodic basis. For example, the inventory may be updated every week, every month or at the end of an accounting period. The updation of the inventory typically happens after a physical count of the inventory.

Under the perpetual inventory, the receipts/purchases and issues/sales are recorded and the inventory on hand is the balancing amount. However, under the periodic inventory, the inventory on hand is computed basis the physical count of inventory and the balancing amount is the cost of the goods sold.

The perpetual inventory system does not cause any disturbances in the course of operations as the inventory at any point in time can be known from the inventory records. However, under the periodic inventory system, the operations and movement of inventory may be required to be halted till the physical count of inventories is completed so that the same is correct and includes all inventories and there is no duplication or miss outs in the count.

The perpetual inventory system is costlier than the periodic inventory system but it provides more accurate and up-to-date data. The perpetual inventory system is thus suited to larger organisations which may have large number of items of inventory while the periodic inventory system is commonly used by smaller organizations dealing with fewer inventory items.

Under perpetual inventory system, all transactions pertaining to purchases, purchase returns and allowances, cost of sales and cost of sales returns are recorded under a single ledger account for Inventory. Separate ledger accounts are not maintained.

Under the periodic inventory system, separate ledger accounts are maintained for purchase, purchase returns, freight-in, purchase discounts, etc.