Periodic Inventory System Versus Perpetual Inventory. Journal Entries.

In this video, we explain periodic inventory system versus perpetual inventory using journal entroes

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Periodic Inventory System vs. Perpetual Inventory System


Introduction

Inventory management is vital for businesses, especially merchandisers, who need accurate inventory tracking to ensure profitability. Two common systems used are the periodic inventory system and the perpetual inventory system. Each has its own benefits and limitations, and businesses must choose based on their specific needs. In this blog, we will discuss the differences, advantages, and disadvantages of both systems to help you make an informed choice.

Periodic Inventory System
In a periodic inventory system, inventory is updated at specific intervals, such as monthly or annually. The company does not continuously track transactions; instead, physical counts are conducted at the end of each period to determine the ending inventory and cost of goods sold (COGS).

Key Features:

Physical Counts: Inventory is only updated after conducting a physical count.

COGS Calculation: The formula used is:

COGS = Beginning Inventory + Purchases - Ending Inventory

Advantages:

Simplicity: Easy to use, making it cost-effective for small businesses.
Less Technology Required: Ideal for businesses that don’t want to invest heavily in technology.

Disadvantages:

Less Accurate: Inventory records can be inaccurate between physical counts, leading to potential stockouts or overstocking.

Labor-Intensive: Requires time-consuming physical counts that are prone to human error.

Delayed Financial Reporting: Financial information may not be up-to-date during the accounting period.

Perpetual Inventory System
The perpetual inventory system continuously updates inventory records as transactions occur. Every sale, purchase, or return is recorded in real-time, providing up-to-date inventory levels and immediate COGS calculation.

Key Features:

Real-Time Tracking: Inventory is automatically updated with every transaction.
Instant COGS Calculation: COGS is updated in real-time as inventory is sold.

Advantages:

Accurate and Up-to-Date: Provides real-time inventory levels, helping prevent stockouts or overstocking.

Operational Efficiency: Managers can make quick, informed decisions based on accurate data.

Fraud Detection: Continuous tracking can detect discrepancies or theft faster.

Disadvantages:

High Cost: Implementing a perpetual system requires investment in technology like inventory software and scanning equipment.

Complexity: It is more complex to set up and requires technical know-how.

Training Required: Employees need training to correctly input transactions into the system.

Smaller businesses may prefer the periodic system for its simplicity and low cost.
Larger businesses or those with high-volume transactions may benefit from the perpetual system for its real-time tracking and accuracy.

Budget:
The periodic system is less expensive, making it attractive for companies with limited budgets.
The perpetual system requires a higher initial investment but offers long-term efficiency and accuracy.

Technology Requirements:
Businesses that can afford modern inventory management technology should consider the perpetual system.
Those preferring a simpler setup with fewer tech requirements may find the periodic system more suitable.

Conclusion

Both inventory systems have their advantages and drawbacks. The periodic system is easy to use and cost-effective, but it lacks real-time data, which can lead to inaccuracies. The perpetual system offers real-time inventory management, improved accuracy, and better operational insights, but it requires significant financial and technical investment. Choosing the right system depends on your business size, budget, and the level of inventory control needed.



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