Question

What is the main difference between a perpetual inventory system and a periodic inventory system? Which system is used more often by major companies?

 

 

Answer 1

Difference between periodic and perpetual inventory system

 

Periodic inventory system: 

It is a system of inventory control in which both the units and value of ending inventory is determined at the end of the accounting period. Units are determined by physical counts, and value is determined by different methods such as First-In, First-Out, Last-In, First-Out, Specific Identification method, and Average cost method.

 

Perpetual inventory system: 

In this system, the inventory is recorded on a regular basis. The inventory is recorded immediately at the time of every purchase or sale. It does not consider the physical inventory. Goods are valued using the same methods as followed in periodic inventory system.

 

Key differences:

The two inventory systems differ with respect to their inventory recording procedure. The following are the key differences:

• Under periodic system, the inventory account is updated only at the end of the period. A temporary account, called Purchases, is used to keep track of the acquisitions of inventory during the period.

• It relies on a count of the inventory on hand at the end of the period to determine the amount to be assigned to ending inventory on the balance sheet and to cost of goods sold expense on the income statement.

• Under the perpetual system, the merchandise inventory account is updated each time a sale or purchase is made. Therefore, the perpetual system continuously shows the inventory on hand and cost of goods sold.

Difference between periodic and perpetual inventory system

 

Periodic inventory system: 

It is a system of inventory control in which both the units and value of ending inventory is determined at the end of the accounting period. Units are determined by physical counts, and value is determined by different methods such as First-In, First-Out, Last-In, First-Out, Specific Identification method, and Average cost method.