Compare and Contrast Perpetual versus Periodic Inventory Systems ACCT&202 working



When a company sells products in a perpetual inventory system, the expense account increases and grows the cost of goods sold (COGS). COGS represents production costs and expenses during a specific period. This includes the materials and labor costs but not distribution or sales expenses. One of the main differences between these two types of inventory systems involves the companies that use them.

  • In the periodic section, we used a separate purchases account to track new inventory coming during the period, and then we used that account in a formula to calculate cost of goods sold.
  • Physical inventory refers to the actual quantity of goods on hand at a given time, typically determined through a physical count.
  • Periodic inventories can be done once a week, monthly, at the end of every quarter, or annually based on the size of the items in stock.
  • Square, Inc. has expanded their product offerings to include Square for Retail POS.

Sales Discounts, Sales Returns and Allowances, and Cost of Goods
Sold will close with the temporary debit balance accounts to Income
Summary. Visual inspection can alert the employees as to the quantity of inventory on hand. Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold will close with the temporary debit balance accounts to Income Summary. Overall, once a perpetual inventory system is in place, it takes less effort than a physical system. However, the startup costs for a perpetual inventory system are greater.

Examples of Inventory Costing Systems

Since the system requires regular updates, manual and paper record-keeping will be hard to keep up with the changing inventory levels. Let us discuss how perpetual and periodic inventory systems work and how they differ. Many companies may start off with a periodic system because they don’t have enough employees to do regular inventory counts. But this can change as companies grow, which means they may end up using the perpetual inventory system when their labor pool expands. (Figure) summarizes the differences between the perpetual and periodic inventory systems. In earlier periods, non-continuous or periodic inventory systems were more prevalent.

  • Under periodic inventory systems, a temporary account, Purchase Returns and Allowances, is updated.
  • Having just these three items on the spreadsheet makes analyzing the data and making the necessary adjustments a straightforward process.
  • With advancements in point-of-sale technologies, inventory is updated automatically and transferred into the company’s accounting system.

Thus, any changes to inventory levels are recorded directly in the inventory account. Companies would normally use a periodic inventory system if they sell a small quantity of goods and/or if they don’t have enough employees to conduct a perpetual inventory count. Small businesses, art dealers, and car dealers are several examples of the types of companies that would use this accounting method. A sales allowance and sales discount follow the same recording
formats for either perpetual or periodic inventory systems. Here, we’ll briefly discuss these additional closing entries and adjustments as they relate to the perpetual inventory system.

Reduced training and technical requirements

As a child, one of my favorite days of the year was when I would go to work with my dad on a Saturday to count inventory. He managed a box plant, and the massive rolls of paper that would later become boxes needed to be counted for that period’s inventory accounting. Which is used in a perpetual inventory system depending on business policies and preferences. 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. In the perpetual inventory system, you know real-time demands and trends.

Cash Flow Management Tips for E-commerce Businesses

This updates the inventory account more frequently to record exact costs. Knowing the exact costs earlier in an accounting cycle can help a company stay on budget and control costs. The perpetual inventory system gives real-time updates and keeps a constant flow of inventory information available for decision-makers. With advancements in point-of-sale technologies, inventory is updated automatically and transferred into the company’s accounting system. This allows managers to make decisions as it relates to inventory purchases, stocking, and sales.

At DXP, we offer top-notch supply chain management solutions to a broad clientele base. Our inventory management services are tailored to your business model, so that the payback for new efficiencies is kept to a minimum. For organizations seeking to optimize how they conduct business, ask about our vendor-managed inventory services. There are various benefits and drawbacks of a periodic inventory system are outlined below. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Short multiple-choice tests, you may evaluate your comprehension of Inventory Management.

Gross Profit Method

It may make sense to use the periodic system if you have a small business with an easy-to-manage inventory. If you have a larger company with more complex inventory levels, you may want to consider implementing a perpetual system. The software you introduce into the workflow will make it easier for you to update and maintain your inventory.

The information can be more robust, with exact purchase costs, sales prices, and dates known. Although a periodic physical count of inventory is still required, a perpetual inventory system may reduce the number of times physical counts are needed. Perpetual inventory is a system for inventory management in which inventory levels are continually updated as items are sold or received.

This lead time reduction in inventory management is one of the main benefits of a perpetual system. A perpetual inventory system (AKA a continuous inventory system) keeps track of all items sold and restocked in real-time. This system automatically updates available data and notifies operators any time changes occur in their inventories. Using a periodic inventory system requires the dedication of employees to the task of manually counting every single item in the inventory. This will divert valuable man-hours that could have been spent in other productive activities to a repetitive task.