Inventories are two types they are periodic inventory and perpetual inventory. They have some differences, here we discuss Difference between periodic and perpetual inventory system in the following cases:
|Topic||Periodic Inventory System||Perpetual inventory System|
|Periodic||It maintains periodic intervals.||It does not maintain periodic intervals.|
|Control||It is not a better control system over inventories.||It is a better control system over inventories.|
|Uses||It is widely used.||It is narrowly used.|
|Scope||It has good scope in small business.||It has good scope in large business|
|The cost of Goods Sold||It shows the cost of goods sold at the end of the accounting period.||It shows the cost of inventory on hand at any time.|
|Unit Value||It supports lower unit value.||It supports higher unit value.|
Periodic System & Perpetual System
Periodic inventory exactly is a market research. It would let you know about the cost of best-sold product, a list of best sold product and products which bring similar advantage. The periodic system depends upon associate degree occasional physical count of the inventory to see the ending inventory balance and therefore the price of products sold-out, whereas the continuous system keeps continual track of inventory balances. There is various type of alternative system between the two systems. Below, I’m explaining you the difference between them.
The periodic system uses a different physical count to measure the level of inventory and the cost of goods sold (COGS). Merchandise purchases are listed in the purchases description. The stock account and the cost of gains sold account are renewed at the end of a set period. It could be once a period, once a quarter, or earlier a year. The cost of goods sold is a critical accounting metric, which when subtracted from revenue, shows a company’s gross margin.
In contrast, the perpetual system retains track of inventory balances continuously, with modernizing made automatically whenever a product is received or sold. Purchases and records are instantly recorded in the index account. As long as where is no theft or destruction, the record account balance should be right. The cost of merits sold account is also modernized continuously as each sale is delivered. Regular inventory systems use digital technology to track inventory in real time working updates sent electronically to accessible databases.
The periodic system relies upon an extraordinary physical count of the record to determine the ending register remainder and the cost of goods sold, while the regular system keeps eternal track of inventory profits. There are some other variations between the two systems.
Difference between periodic and perpetual inventory system
- Accounts: Under the perpetual policy, there are continual refreshes to either the general entries or inventory journal as inventory-related activities occur. Conversely, under a periodic record system, there is no cost of goods sold consider entry at all in an accounting session until there is a physical count, which is then used to determine the cost of goods sold.
- Computer systems: It is improbable to manually maintain the reports for a perpetual inventory system, since there may be numerous of transactions at the unit level in every accounting period. Conversely, the simplicity of a periodical inventory operation allows for the use of standard record keeping for very miniature inventories.
- The cost of goods sold: Under the constant system, there are persistent updates to the cost of goods sold statement as each sale is delivered. Conversely, under the periodic inventory regularity, the cost of goods sold is determined in a lump sum at the end of the recording period, by adding total investments to the beginning inventory and subtracting closing inventory.
- Cycle counting: It is impracticable to use cycle counting supporting a periodic inventory system since there is no system to obtain accurate inventory numbers in real time (which are used as a baseline for period counts).
- Purchases: Under the regular system, inventory purchases are recorded in either the raw supplies inventory account or commodity account (depending on the quality of the purchase), whereas there is also a unit-count entry into the personal record that is kept for each inventory part. Conversely, under a periodic inventory system, all properties are recorded in a purchases asset statement, and there are no individual inventory documents to which any unit-count knowledge could be added.
- Transaction investigations: It is almost improbable to track through the accounting studies under a periodic inventory system to ascertain why an inventory-related oversight of any kind occurred since the information is crossed at a very high level. Conversely, such studies are much easier in a perpetual inventory policy, where all transactions are available in detail at the unique unit level.
This list makes it clear that the constant inventory system is much preferred to the periodic inventory system. The only case where a periodic policy might make sense is when the quantity of inventory is very small, and wherever you can visually review it without any particular need for more detailed inventory reports. The periodic method can also work well when the warehouse staff is poorly trained in the uses of a continuous inventory system since they might inadvertently record transactions incorrectly in a permanent system.
You may like also:
- Types of inventory systems and their characteristics
- The concepts / Assumptions / Principles of accounting