Perpetual Inventory Systems Explained

There is a gap between the sale or purchase of inventory and when the inventory activity is recognized. A faster inventory system enables companies to react faster to the supply and demand of the market. Perpetual inventory systems may be preferable to older periodic inventory systems because they allow for immediate tracking of sales and inventory levels for individual items, which helps to prevent stockouts.

Key Features of Perpetual Inventory Systems

However, advanced computer software packages have made its use easy for almost all business situations and the companies selling any kind of inventory can now benefit from the system. You will have ongoing, accurate results if you properly manage your perpetual inventory by updating it on a regular basis. Gather feedback from your team, identify any issues, and make necessary adjustments.

Choosing Inventory Management Software

This system starts with the baseline from a physical count and updates based on purchases made in and shipments made out. A growing company with an increasingly complex supply chain can benefit from adopting a perpetual inventory system. The real-time inventory data provided by this method facilitates global alternator decoupler pulleys better decision-making when it comes to purchasing, production planning, and overall supply chain management. If your business deals with high-value items or products that sell quickly, using a perpetual inventory system allows you to maintain accurate and real-time stock levels.

Advantages of Perpetual Inventory Systems

Since there is no constant monitoring, it may be more difficult to make in-the-moment business decisions about inventory needs. FIFO (first-in, first-out) is a cost flow assumption that businesses use to value their stock where the first items placed in inventory are the first items sold. So the inventory left at the end of the period is the most recently purchased or produced.

How Do I Calculate Perpetual Inventory?

Let us evaluate how your business can leverage a perpetual inventory system to improve overall operations. On the other hand, some cons may include additional training for employees to use the system, setup costs, and incorrect inventory levels from mistakes such as entering the wrong quantity. If you or your employees make mistakes while entering inventory, fixing the error can be time-consuming. When you use perpetual inventory, the POS system automatically makes changes to your inventory levels. You can access your inventory reports online anytime, making it easier to manage or purchase inventory. Transitioning to a perpetual system for inventory management requires readiness in terms of technology, staff, and processes.

How to Use a Perpetual Inventory System for Your Ecommerce Business

After an accounting period, a periodic inventory system determines COGS in a lump sum following a physical inventory. Before the end of the accounting period, it is impossible to decide on an exact COGS. If you want to learn more about inventory accounting, and how to properly streamline your inventory management process, head over to our complete guide on inventory management. The primary issue that companies face under the periodic inventory system is the fact that inventory information is not up to date, and may be unreliable.

  1. In a perpetual inventory system, COGS is calculated automatically after each sale by multiplying the number of units sold by their respective costs per unit (source).
  2. Many companies counter this with periodic partial inventory counts, which provide a baseline for the perpetual system and are designed to provide a full physical inventory by the end of the period.
  3. This is done through computerized systems using point-of-sale (POS) and enterprise asset management technology that record inventory purchases and sales.
  4. Each of these methods has its pros and cons when it comes to use within a perpetual inventory system.

During periods of inflation, a LIFO system may be more appropriate for companies that do not wish to pay as much in taxes, because it will show a higher COGS expense and a lower net income. Therefore, your company has a lower tax liability in a LIFO system, because businesses get taxed on profit. The Internal Revenue Service allows companies to use LIFO in their tax accounting, even when they use FIFO in their financial statements.

This detailed paper trail is invaluable for auditing purposes and for understanding the flow of goods through the company. It also offers insight into potential areas for improvement in inventory management. Furthermore, the system can integrate with other business systems such as accounting software and warehouse management systems, ensuring accurate financial records and a seamless flow of information. This integration allows for more efficient handling and distribution of inventory. In essence, a perpetual inventory system is a powerful tool that uses technology to create a comprehensive, accurate, and integrated approach to managing a company’s inventory.

This is, instead, performed automatically through a perpetual inventory system that electronically changes the inventory number on the software system, often performed through the use of a point-of-sales system. A perpetual inventory system uses point-of-sale terminals, scanners, and software to record all transactions in real time and maintain an estimate of inventory on a continuous basis. A periodic inventory system requires counting items at various intervals—i.e., weekly, monthly, quarterly, or annually. A purchase return or allowance under perpetual inventory systems updates Merchandise Inventory for any decreased cost. Under periodic inventory systems, a temporary account, Purchase Returns and Allowances, is updated. Purchase Returns and Allowances is a contra account and is used to reduce Purchases.

In a perpetual LIFO system, the last costs available at the time of the sale are the first that software moves from the inventory account and debits from the COGS account. See the example LIFO perpetual inventory card below to get an idea of how it works. The retail sales for this product in this company were $25,000 from Jan. 1, 2019 to Jan. 15, 2019. First-In-First-Out (FIFO) dictates that the first inventory items that reach the warehouse should be the first that are sold to or by the retailer. When applied to the context of a perpetual inventory method, tracking of individual items’ acquisition date and cost becomes far more manageable. The FIFO method offers several benefits, such as minimizing spoilage and obsolescence.

The calculated inventory levels derived by a perpetual inventory system may gradually diverge from actual inventory levels, due to unrecorded transactions or theft. Therefore, you should periodically compare book balances to actual on-hand quantities (typically using cycle counting) and adjust the book balances as necessary. The perpetual inventory system is a more robust system than the periodic inventory system, which is where a company undertakes  regular audits of stock to update inventory information. These audits include regular physical inventory counts on a scheduled and periodic basis.

In a periodic system, companies calculate Cost of Goods Sold (COGS) directly after a physical inventory, as they do not keep it on a rolling basis, nor do they update it continuously after each transaction. They do not keep an inventory account in a periodic system since they debit all purchases to a purchase account. Once the period is complete, the company adds the purchase account totals to the inventory’s beginning balance. Then, the company can also compute the cost of goods available for sale for the new period.

Perpetual inventory system allows you to identify when the stock is running out and gives accurate information about inventory value and COGS. These allow you to investigate theft, discrepancies, shrinkage and even count errors immediately and adjust the records accordingly. Periodically compare your accounting books to on-hand inventory to ensure your inventory balances are correct. Look for a software partner who will provide comprehensive training sessions, focusing on the usage of new hardware, software functionalities, and best practices for inventory management.

This constant updating allows businesses to be aware of their best-selling goods and services and what inventory is running low on supply. It took time to reliably and swiftly record and analyze the vast volumes of data. Besides, technological advancements have enhanced business and accounting procedures recently.

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