Question

What is the difference and similarities od perpectual inventory vs. periodic inventory systems?

Answer 1

Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point of sale systems and enterprise asset management software.

Periodic Inventory is a system of inventory in which updates are made on a periodic basis.

Difference beyween Perpetual inventory and periodic inventory system

1. Inventory Account and cost of goods sold account are updated continuously during the period in perpetual inventory system and in periodic inventory system they are updated only at the end of period

2. In perpetual inventory system purchases and purchase return are directly debited and credited to inventory account respectively where as in periodic inventory system these accounts are used and updated continuously.

3. Perpetual inventory system doesnot requires closing entry for inventory account where as in periodic inventory system closing inventory is required to update inventory and cost of goods sold.

Similarity between Perpetual and periodic inventory system

Perpetual; All inventory entries directly affect inventory

Periodic; All inventory entries affect other accounts, which are then closed to inventory.

EXAMPLE: A company purchased $100 worth of inventory on account of

Perpetual: Inventory       Dr.               $100

                    To Accounts Payable              $100

Later with periodic (usually at the end of the reporting period)

                Inventory        Dr.              $100

                    To Purchases                         $100

This last entry closes purchases and updates your inventory account.