Periodic vs Perpetual Inventory System: Definition, Differences, Advantages, and Disadvantages

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A periodic inventory system is an inventory control method where the inventory status is updated at the end of a specific period, rather than after every sale and purchase.

In contrast, In a perpetual inventory system, inventory status is continuously updated after every sale and purchase. This method updates data in real time, which allows businesses to get an accurate picture of their inventory levels at any given time.

Differences between periodic and perpetual inventory systems:

The primary difference between periodic and perpetual inventory systems is the way in which inventory levels are tracked and updated.

Here are the key differences:

1. Frequency of inventory updates:

• Perpetual inventory systems update inventory levels continuously in real-time through the use of technology such as barcodes, RFID tags, and inventory management software.
• Periodic inventory systems update inventory levels periodically, usually at the end of a reporting period, by physically counting inventory items.

2. Accuracy of inventory levels:

• Perpetual inventory systems provide real-time visibility into inventory levels and can identify issues such as stockouts or overstocking immediately, allowing for prompt reordering or adjustments.
• Periodic inventory systems may not provide accurate and up-to-date inventory levels and may result in understocking or overstocking, which can lead to lost sales or excess inventory costs.

3. Cost of implementation:

• Perpetual inventory systems require more sophisticated technology and specialized knowledge, making them more expensive to implement and maintain than periodic inventory systems.
• Periodic inventory systems are simpler and less expensive to implement and maintain, making them more accessible to small businesses with limited resources.

4. Valuation of inventory:

• In perpetual inventory systems, inventory is valued on an ongoing basis, based on the actual cost of each item at the time of purchase.
• In periodic inventory systems, inventory is valued periodically, usually at the end of the reporting period, based on the physical count of inventory items.

The main advantage of a perpetual inventory system is that it provides real-time visibility into inventory levels, allowing businesses to make more informed decisions about inventory management. The main advantage of a periodic inventory system is its simplicity and lower cost of implementation, making it more accessible to small businesses.

Periodic Inventory System	Perpetual inventory system
1. Update inventory records after a periodic period.	1. Update inventory records after every movement.
2. Well fit for small businesses having small numbers of items.	2. Well fit for all sizes of businesses.
3. Need seasonal employees for physical counting in a period.	3. Need trained employees to manage a perpetual inventory system.
4. Cheaper than a perpetual inventory system.	4. Expensive compared to a periodic inventory system.

What is a periodic inventory system:

In a periodic inventory system inventory is physically counted and updated at the end of a period. Physically inventory counting is time-consuming, so businesses do this once in a period. Before doing a periodic update, the system shows the previous inventory balance recorded in the previous period.

Under a periodic inventory system:

Under a periodic inventory system, inventory is counted at the end of a period. Periods may be monthly, quarterly, or annual based on their business type, size, and accounting strategies.

Periodic inventory method:

A Periodic inventory system is following a simple method. Inventory is counted once in a period. The cost of goods sold in that period is counted by taking the inventory status at the beginning of a period, adding new inventory purchases during the period, and deducting the ending inventory.

Costs of goods sold of a period= (Beginning Inventory + Purchase for the period) – Ending Inventory

Periodic system accounting:

Suppose, Mr. Mohammad has a business or a company using a periodic inventory system and his business period starts on Jan. 1 and ends on Dec. 31(Once a year). In the last year (supposedly 2021), the ending or closing inventory was $50,000 and that was the beginning inventory for this year 2022. This year from Jan. 1, 2022, to Dec. 31, 2022, Mr. Mohammad purchase $75,000, and after-sales this year on Dec. 31, 2022, physically counting inventory found $65,000.

So, the Costs of goods sold are found in 2022 :
COGS= ($50,000 + $75,000) – $65,000;
=$60,000;

After finishing a period and before starting the next one, purchase inventory is recorded in the purchase account, and these are shifted to the inventory account in the next periodic update.

The periodic inventory system updates the general ledger account Inventory at the end of the period.

Advantages and disadvantages of periodic inventory system:

The periodic inventory system has several advantages, including simplicity, low cost, and the ability to manage inventory levels without significant investment in technology or resources.

However, it also has some disadvantages, such as limited accuracy, lack of real-time visibility into inventory levels, and the potential for errors in record-keeping.

Ultimately, businesses must weigh the pros and cons of the periodic inventory system and consider factors such as inventory turnover rate, the size of the business, and available resources to determine whether it is the right inventory management approach for their specific needs.

Advantages of periodic inventory system:

Periodic inventory systems are a type of inventory management system in which inventory levels are not tracked on a continuous basis. Instead, inventory levels are counted at specific intervals, such as once a month or once a quarter. This type of system is often used by small businesses or businesses with low inventory turnover.

There are several advantages to using a periodic inventory system. First, it is relatively easy to implement and maintain. Second, it is often less expensive than perpetual inventory systems. Third, it can be less time-consuming to count inventory at specific intervals than to track inventory levels continuously.

However, there are also some disadvantages to using a periodic inventory system. First, it can be less accurate than perpetual inventory systems. This is because inventory counts are only taken at specific intervals, so there is a greater chance of errors occurring. Second, it can be more difficult to track inventory trends. This is because inventory levels are not tracked continuously, so it can be difficult to identify trends and patterns in inventory usage.

Periodic inventory systems can be a good choice for businesses with low or high inventory turnover rates, as long as the business is able to accurately count its inventory on a regular basis. However, it is important to weigh the advantages and disadvantages of this type of system before deciding whether or not to use it.

Here are some of the advantages of periodic inventory systems:

1. Often easy to implement and maintain. Periodic inventory systems are relatively easy to implement and maintain, especially for small businesses with low inventory turnover. This is because they do not require the use of complex software or hardware.
2. Often less expensive than perpetual inventory systems. Periodic inventory systems are often less expensive to implement and maintain than perpetual inventory systems. This is because they do not require the use of complex software or hardware.
3. Often less time-consuming to count inventory. Periodic inventory systems are less time-consuming to count inventory than perpetual inventory systems. This is because inventory is only counted at specific intervals, such as once a month or once a quarter.

Disadvantages of periodic inventory system:

However, there are also some disadvantages to periodic inventory systems:

1. Can be more time-consuming to implement and maintain than perpetual inventory systems: The amount of time it takes to implement and maintain a periodic inventory system will vary depending on the size and complexity of the business, as well as the specific system that is used. For example, a small business with a simple inventory system may be able to implement and maintain a periodic inventory system in a few hours. However, a large business with a complex inventory system may need to spend several weeks or even months implementing and maintaining a periodic inventory system.
2. Can be less accurate than perpetual inventory systems: This is because periodic inventory systems rely on physical counts of inventory, which can be inaccurate due to human error, theft, or damage to inventory. Perpetual inventory systems, on the other hand, track inventory levels in real time, which can help to improve accuracy.
3. Can be more difficult to track inventory trends: This is because periodic inventory systems only provide information about inventory levels at specific points in time. Perpetual inventory systems, on the other hand, track inventory levels continuously, which can help to identify trends and patterns in inventory usage.
4. Less accurate than perpetual inventory systems. Periodic inventory systems are less accurate than perpetual inventory systems. This is because inventory counts are only taken at specific intervals, so there is a greater chance of errors occurring.
5. More difficult to track inventory trends. Periodic inventory systems are more difficult to track inventory trends than perpetual inventory systems. This is because inventory levels are not tracked continuously, so it can be difficult to identify trends and patterns in inventory usage.

When you use a periodic inventory system:

Businesses that don’t need current inventory status instead it’s enough to keep tracking inventory in period periods and can use a periodic inventory system. It works well for having a small number of inventory transactions looking to keep costs low.

Since physical inventory counting is time-consuming, a periodic inventory system is suitable for businesses having a small amount of inventory where it’s easy to complete a physical count.

The periodic inventory system uses businesses having few inventory items and few inventory item units sales per month such as art galleries and car dealerships.

Businesses that are suitable for a periodic inventory system are typically those with:

1. Simple inventory management: Businesses with simple inventory management systems, such as those with only one product line or a limited number of products, are well-suited to periodic inventory.
2. Low inventory turnover: If a business only sells a few items or has slow-moving inventory, a periodic inventory system may be sufficient.
3. Small size: Smaller businesses with limited resources may find a periodic inventory system more manageable than a perpetual system.
4. No need real-time inventory information: If a business does not require real-time information on inventory levels, a periodic system may be sufficient.
5. Infrequent sales: If a business only sells a product occasionally, a periodic inventory system may be a good fit because it only requires a physical count of the inventory at set intervals.

Some examples of how periodic inventory systems are used in different types of businesses:

• Small businesses with low inventory turnover. Periodic inventory systems are often used by small businesses with low inventory turnover. This is because periodic inventory systems are less expensive and time-consuming to implement and maintain than perpetual inventory systems.
• Businesses with seasonal inventory needs. Periodic inventory systems can also be used by businesses with seasonal inventory needs. This is because periodic inventory systems allow businesses to track inventory levels more accurately during peak sales periods.
• Businesses with high-value inventory. Periodic inventory systems can also be used by businesses with high-value inventory. This is because periodic inventory systems can help businesses to reduce the risk of theft or loss.

Challenges of implementing a periodic inventory system:

Here are some challenges of implementing a periodic inventory system:

1. Manual counting: Periodic inventory systems require businesses to manually count their inventory at regular intervals. This can be a time-consuming and labor-intensive process.
2. Accuracy: Manual counting can be error-prone. If inventory is counted incorrectly, it can lead to inaccurate financial statements and poor decision-making.
3. Security: Periodic inventory systems are more vulnerable to theft and fraud than perpetual inventory systems. This is because businesses only track inventory levels at regular intervals, which leaves a window of opportunity for theft and fraud to occur.
4. Compliance: Businesses that use periodic inventory systems may have difficulty complying with government regulations. This is because periodic inventory systems do not provide real-time inventory data, which can make it difficult to track inventory levels and ensure compliance.

Periodic inventory systems can be a challenge to implement and use. Businesses should carefully consider the challenges before deciding whether to implement a periodic inventory system.

What is a perpetual inventory system:

A perpetual inventory system is a real-time inventory management system where inventory status is continuously updated after every inventory movement including purchases, sales, and returns. When physically entering or leaving an inventory we enter data on a perpetual system and the system shows the inventory status.

Here, we don’t count physical inventory every day rather we physically count inventories and match it with the system when making an audit which is called inventory reconciliation.

How does a perpetual inventory system work?

A perpetual inventory system works by continuously tracking inventory levels in real-time. This is achieved through a combination of manual and automated processes. Here’s how it typically works:

Inventory Setup: Each item in inventory is assigned a unique identifier, such as a barcode, a serial number, or a SKU (Stock Keeping Unit). This allows the system to track each item individually, and to associate it with relevant information, such as the product name, cost, and supplier.

Record Keeping: Every time a transaction occurs that affects inventory levels, such as a sale, a purchase, a return, or an adjustment, the system records it in the inventory database. The record includes details such as the date, the quantity, the cost, and the location of the item.

Updating Inventory Levels: As each transaction is recorded, the system updates the inventory levels in real-time. For example, if a customer purchases five units of a product, the system will reduce the inventory count by five units. If a new shipment of the same product arrives, the system will increase the inventory count accordingly.

Reorder Point: To avoid stockouts, businesses can set a reorder point, which is the minimum quantity of a product that should be in stock at any given time. When the inventory level falls below the reorder point, the system can generate an alert, reminding the business to place an order to replenish the stock.

Reporting: A perpetual inventory system generates a range of reports that provide insights into the inventory levels, the cost of goods sold (COGS), and the value of remaining inventory. These reports can help businesses make informed decisions about when to reorder stock, how to optimize inventory levels, and which products are selling well.

A perpetual inventory system helps businesses stay on top of their inventory levels and make informed decisions about managing their stock. By providing real-time visibility into inventory levels and transaction history, the system can help businesses reduce stockouts, improve inventory accuracy, and increase efficiency.

When you use a perpetual inventory system:

Perpetual inventory is a system for inventory management in which inventory levels are continually updated as items are sold or received. This system provides real-time inventory information and allows businesses to quickly determine when they need to reorder products. Perpetual inventory systems can provide more accurate and timely inventory data than periodic inventory systems, which can help businesses to better manage their inventory levels and costs. Businesses that require accurate, real-time inventory information can be benefited from a perpetual inventory system.

Businesses that are well-suited for a perpetual inventory system include:

1. Need for real-time inventory information: Businesses that require accurate, up-to-date information on inventory levels, such as those in the manufacturing or distribution industries, will benefit from a perpetual inventory system.
2. High inventory turnover: Businesses with fast-moving inventory, such as those in the retail or wholesale industries, are well-suited to a perpetual inventory system.
3. E-commerce businesses: Online businesses with high volume and frequent sales will benefit from a perpetual inventory system that provides real-time information on inventory levels.
4. Businesses with tight inventory control requirements: Businesses that need to maintain strict control over inventory levels, are well-suited to a perpetual inventory system.
5. Businesses with frequent stock transactions: Businesses that frequently buy and sell stock, will benefit from the real-time information provided by a perpetual inventory system.

Some examples of how perpetual inventory systems are used in different types of businesses:

• Large businesses with high inventory turnover. Perpetual inventory systems are often used by large businesses with high inventory turnover. This is because perpetual inventory systems provide businesses with real-time inventory data, which can help them to make better decisions about inventory levels, pricing, and production.
• Businesses with complex inventory needs. Perpetual inventory systems can also be used by businesses with complex inventory needs. This is because perpetual inventory systems can track the movement of inventory through a variety of channels, such as warehouses, stores, and distribution centers.
• Businesses that need to comply with government regulations. Perpetual inventory systems can also be used by businesses that need to comply with government regulations. This is because perpetual inventory systems can provide businesses with accurate and up-to-date inventory data, which can help them to meet government reporting requirements.

Under a perpetual inventory system:

Since the perpetual inventory system is a real-time inventory management system a good perpetual inventory offers the all features that are needed to manage inventory operations including purchases, sales, returns, transfers, and so on. In a perpetual inventory system, you can easily manage, track, and control inventory activities.

Perpetual inventory method:

Under a perpetual inventory system, you get all purchase and production data, your sales data, and the unsold items with quantities. It also gives the Cost of Goods Sold and profits in a financial period. And for this inventory system follow an inventory valuation method from the below four.

1. Specific Identification:

In specific identification, businesses are entered goods with a unique identification like batch or lot number and keep records of which goods are left based on its identification number. In this way, you easily manage expired dates and can minimize spoilage for both expirable and perishable goods because here you ensure sales that products will expire fast or rot first.

2. First-In, First-Out (FIFO):

First-In, First-Out (FIFO) is one of the most common methods of inventory management. Under this method, you sell first that product which is purchased first means first enter, first out.

3. Last-In, First-Out (LIFO):

Last-In, First-Out (LIFO) is the opposite of First-In, First-Out (FIFO) where the last inventory is sold first especially using restaurants, food & beverage industries to give customers fresh & spicy tastes. In this method, some products spoil, and the loss, for this reason, will be recovered with profits of sold items.

4. Weighted Average Cost:

With the weighted average cost method cost of goods sold(COGS) is calculated on average.

Weighted Average Cost Per Unit = Total Cost of Goods in Inventory / Total Units in Inventory

Perpetual accounting:

In the perpetual system, inventory records are updated constantly. But, in terms of accounting, we generate reports(like balance sheets, income statements, and cash flow statements) for an accounting period(like a fiscal year).

Advantages & disadvantages of perpetual inventory system:

While a perpetual inventory system gives real-time data, actual demands, and supply status, and ensures better customer services, a perpetual inventory system’s disadvantage is it’s expensive in terms of technology and manpower.

Advantages of perpetual inventory system:

In the perpetual inventory management system, continuous inventory updates and real-time data unleash opportunities and help to grow a sustainable business.

There are so many advantages you get in a perpetual inventory system; some are common and some vary business from business. Follow the following brief points which can impact a business from different angles and boost your revenues.

1. Real-time inventory tracking:

The perpetual inventory system is a real-time inventory tracking system where you get real-time inventory status with valuation. Order fulfillment status includes receipt, packing, shipping, and delivery status. For production houses, a perpetual inventory system gives real-time data about raw materials, work in progress, and finished goods.

2. Optimize inventory levels:

In the perpetual inventory system, you know real-time demands and trends. So, it helps you to optimize inventory levels and helps to minimize overstocks and understocks.

3. Improve efficiency:

With the automated process of perpetual inventory systems, businesses can save time and resources compared to manual methods. By eliminating manual errors, this system reduces the risk of stock shortages or overstocking. With accurate and up-to-date inventory data, businesses can make informed decisions about purchase ordering, product ordering, and other important aspects of inventory management.

4. Increase Profitability:

Businesses can improve profit margins by reducing the costs of goods sold including carrying, shipping, holding, and operational costs. The system helps to identify the areas for cost savings, such as reducing waste and optimizing inventory levels.

5. Better customer satisfaction:

With real-time inventory data, you can deliver better services that help grow your business reputation. In the perpetual inventory system businesses can track each movement of inventory and determine which products are selling well and which are not. With the real-time inventory data, businesses can fulfill customer orders quick & fast.

Disadvantages of the perpetual inventory system:

The perpetual inventory system is expensive because you need different types of technical equipment and trained employees.

1. The expense for implementing the system:

The perpetual inventory system has some technological costs including computers, software, barcodes, scanner, and so on.

2. Need trained employees to manage:

To manage a perpetual inventory system you need trained employees which is expensive compared to a periodic inventory system. You have to train employees when implementing the system or accommodate the new one. To appoint new employees you have to train them which is an extra expense.

Challenges of implementing a perpetual inventory system:

Here are some challenges of implementing a periodic inventory system:

1. Cost: Perpetual inventory systems can be more expensive to implement and maintain than periodic inventory systems. This is because they require additional hardware, software, and training.
2. Complexity: Perpetual inventory systems can be more complex to implement and use than periodic inventory systems. This is because they require businesses to track inventory levels in real time.
3. Data accuracy: Perpetual inventory systems are only as accurate as the data that is entered into them. If data is entered incorrectly, it can lead to inaccurate inventory levels and costs.
4. Security: Perpetual inventory systems can be a target for hackers. Businesses need to take steps to protect their systems from unauthorized access.

Choose the right inventory system for your business:

Selecting the appropriate inventory system for your business is a crucial decision that can significantly impact your operational efficiency and profitability. With numerous options available in the market, it’s essential to consider several factors to determine the system that aligns best with your business size and needs.

1. Consider your business size and needs. The size and needs of your business will play a big role in determining the right inventory system for you. For example, if you have a small business with low inventory turnover, you may not need a complex perpetual inventory system. A periodic inventory system may be sufficient for your needs.
2. Think about your budget. Inventory systems can range in price from free to thousands of dollars per month. It’s important to set a budget before you start shopping for an inventory system. This will help you narrow down your options and choose a system that fits your needs and your budget.
3. Consider your level of technical expertise. Some inventory systems are more complex than others. If you’re not very tech-savvy, you may want to choose a system that is easy to use and doesn’t require a lot of technical expertise.
4. Read reviews. Once you’ve narrowed down your options, it’s a good idea to read reviews of different inventory systems. This will give you an idea of what other businesses have experienced with each system.
5. Contact vendors. Once you’ve found a few inventory systems that you’re interested in, contact the vendors to get more information. This will give you a chance to ask questions and get a better understanding of each system.

By following these tips, you can choose the right inventory system for your business.

Latest changes in inventory management:

Inventory management is a critical aspect of running a successful business, and staying updated with the latest changes in this field is crucial to maintain a competitive edge. In recent years, several significant developments have emerged, transforming the way businesses handle their inventory.

This article highlights some of the latest changes in inventory management, showcasing the advancements that have revolutionized the industry

1. The rise of cloud-based inventory management systems. Cloud-based inventory management systems are becoming increasingly popular as they offer a number of advantages over traditional on-premise systems. These advantages include lower costs, increased flexibility, and easier scalability.
2. The use of big data and analytics in inventory management. Big data and analytics are being used to improve inventory management in a number of ways. For example, big data can be used to identify trends in demand, which can help businesses to better forecast demand and optimize inventory levels. Analytics can also be used to identify areas where inventory is being wasted, which can help businesses to reduce costs.
3. The increasing use of automation in inventory management. Automation is being used to improve inventory management in a number of ways. For example, robots are being used to pick and pack orders, which can help to improve efficiency and accuracy. Automated systems are also being used to track inventory levels and identify potential problems, which can help businesses to prevent stockouts and other disruptions.

These are just a few of the latest changes in inventory management. As technology continues to evolve, we can expect to see even more changes in the way that businesses manage their inventory in the future.

Conclusion:

Periodic and perpetual both are inventory management systems with a view to managing inventory data. In a periodic system inventory data updates after a specific period and in a perpetual system data updates after every inventory movement including purchases, sales, transfers, etc. A periodic system is cheaper than a perpetual inventory system.

The question is which one is better?

It depends based on your business and strategy.

Frequently asked questions about periodic and perpetual inventory system:

Periodic and perpetual both are inventory management systems. The importance of inventory management systems increasing rapidly for both small and large businesses. People search on Google. Here, I give some FAQS that are asked frequently.

Periodic inventory system is the same as physical inventory system?

“The terms ‘periodic inventory system’ and ‘physical inventory’ are often used interchangeably, but they have distinct meanings. Physical inventory refers to the actual quantity of goods on hand at a given time, typically determined through a physical count. The periodic inventory system, on the other hand, is an accounting method that determines inventory levels at specific intervals, such as monthly or quarterly, rather than continuously updating inventory records after each transaction.

Discrepancies between physical inventory counts and the recorded inventory levels in a periodic inventory system can arise from various factors, including administrative errors, shoplifting, or damage to goods. These discrepancies highlight the limitations of relying solely on a periodic inventory system for accurate inventory tracking.

Traditional or manual inventory systems, where inventory activities are managed manually and information is stored on paper, are sometimes referred to as physical inventory systems. However, this term is not entirely accurate, as it implies that these systems directly reflect the physical inventory at hand.

In contrast, the periodic inventory system is a software-based solution that updates inventory transaction data periodically. It does not provide real-time inventory tracking, as updates are made at predetermined intervals rather than after each transaction.”

What is the formula for periodic inventory?

The total amount of the goods that are available to be sold=Starting inventory (based on the last physical inventory)+ Total number of purchases(In the current period)-Total number of sales(In the current period).

Is perpetual inventory LIFO or FIFO?

A perpetual inventory system may use LIFO or FIFO, any of them. LIFO(Last In, First Out) means sales first which purchase last. FIFO(First In, First Out) means sales first which purchase first. Which is used in a perpetual inventory system depending on business policies and preferences.