Perpetual Inventory System
In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. A perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced level of physical inventory counts.
However, the calculated inventory levels derived by a perpetual inventory system may gradually diverge from actual inventory levels, due to unrecorded transactions or theft, so you should periodically compare book balances to actual on-hand quantities (manual stock count) and adjust the book balances as necessary.
Example of Posted Purchase Invoice in a Perpetual Inventory System:
The double entry of a Purchase Invoice in a perpetual inventory system is as such:
Why you should choose Perpetual Inventory System:
- Short term financial statements can be prepared as the values of cost of sales and inventory balances are readily available.
- The inventory ledger cards help to maintain optimum level of inventories, ensuring that the business is never out of inventory or have too much money tied up in inventories.
Periodic Inventory System
In periodic inventory system, merchandise inventory and cost of goods sold are not updated continuously. Instead purchases are recorded in purchases account and each sale transaction is recorded via a single journal entry. Thus cost of goods sold account does not exist during the accounting period. It is determined at the end of accounting period via a closing entry.
Using the same posted purchase invoice as the example above, in a Periodic Inventory System:
The double entry of a Purchase Invoice in a periodic inventory system is as such:
Why you should choose Periodic Inventory System:
- A generally simpler system to administer as compared with the perpetual inventory system.
- If you want greater control in what amount is presented as the inventory valuation in the Financial Statements.