BUS103: Introduction to Financial Accounting

Perpetual inventory updates the quantities continuously and periodic inventory updates the amount only at specific times, such as year end.

LEARNING OBJECTIVES

Explain the differences between perpetual inventory and periodic inventory

KEY TAKEAWAYS

Key Points

• Perpetual inventory, also called continuous inventory, is when information about amount and availability of the product is updated continuously, usually via computer.
• Periodic inventory is a system of inventory in which updates are made on a periodic basis.
• Theft, breakage, or untracked movement can cause the perpetual inventory to be inaccurate.

Key Terms

• breakage: Something that has been broken.
• perpetual: Continuing uninterrupted
• periodic inventory system: accounting for goods and materials held for eventual sale that is not continually updated

Perpetual Inventory

Perpetual inventory, also called continuous inventory, is when information about amount and availability of a product is updated continuously. Generally, this is accomplished by connecting the inventory system either with the order entry system or for a retail establishment the point of sale system.

A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.

Periodic Inventory

Periodic inventory is when information about amount and availability of a product is updated only periodically. Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory. Most companies who use periodic inventory perform this at year-end.

Periodic vs. Perpetual

In earlier periods, non-continuous or periodic inventory systems were more prevalent. Many small businesses still only have a periodic system of inventory.

Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements. These errors lead to systematic errors in replenishment.

Periodic inventory is performed once a year.: Physically counting inventory ensures that book value and physical value are the same.

While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.