Question

If you were starting up a business what factors would influence you when deciding whether to implement a periodic or perpetual inventory system? Which inventory system would you prefer and why?

Answer 1

In Periodic Inventory System the inventory is determined by taking a physical count of the inventory in hand. It is less expensive and simpler.

In Perptual Inventory System the inventory balnce is recorded after each transaction ( receipt and issue ). Periodically the book balance is matched with the physical stock to identify differences.

Factors would influence you when deciding whether to implement a periodic or perpetual inventory system :

Factor		Periodic Inventory System		Perptual Inventory System
Stock Quantity		Higher the quantity more difficult		Doesn't Matter
Inventory Control		Is Hard and often not possible.		More control on the stock . Provides regular and continuous information.
Simplicilty		Simpler		Bit more complicated
No. of Departments		Not preferred if there are number of departments		Preferred
Expenses		Less Expensive		Expensive
Effect on business operations		Requires closure of business for inventory calculation		Inventory can be determinde without affecting operations

The Perpetual Inventory model is preferred despite the cost , as it provides overall control for the inventory and the valuation is simpler. Also it can be used for business of all sizes. Physical Verfiication may be conducted periodically to verify the stock.