Perpetual Inventory vs. Periodic Inventory Systems: Know Its Pros & Cons For Businesses

Introduction

Whether your company is new or already established, you are aware that there are many things you need to monitor, like the working hours of your employees, customer feedback, cash flow, and a host of other things. Don’t forget about your inventory, which is the foundation of your business. You won’t be able to conduct business if you don’t have any things to sell to customers. You could experience stress trying to keep track of everything that comes in and goes out when it comes to inventory. You need to make the appropriate inventory system investment if you want to keep track of all of your assets. Perpetual inventory and periodic inventory are the two most common methods used by companies to track inventory.

Both inventory management systems are excellent at keeping an eye on your stock and making sure you aren’t undercounting products or wasting money. Nevertheless, based on the type of business you run, it’s necessary to weigh the pros and cons of each. Continue reading below to find out more about the distinction between perpetual and periodic inventory as well as how each system functions.

Article Content-

1. Perpetual Inventory System
2. Periodic Inventory System
3. A Comparison of Periodic and Perpetual Inventory Systems: Key Differences
4. Which One is the Best option for your Business?
5. Conclusion

Perpetual Inventory System

As the name implies, the perpetual inventory accounting method for inventory involves tracking inventory “perpetually” as it moves through the supply chain. With this method, warehouses continuously monitor an inventory balance, which means that if a product is delivered or sold through a point of sale, the stock is automatically updated.

Purchases and returns are automatically recorded in the inventory count in the perpetual inventory system.

The perpetual inventory system tracks inventory in real-time by scanning barcodes, using radio frequency identification (RFID) scanners, and integrating inventory management software with point-of-sale systems, customer relationship management systems, marketplaces like Amazon FBA, and return and purchase management systems.

Periodic Inventory System

The periodic inventory system, one of the earliest and simplest inventory management systems, requires “periodic” inventory counts after a specified length of time. These time frames are up to you; they could be as short as a few hours or as long as a year. Small businesses that have fewer stocks to watch or slower sales rates typically use this type of approach.

The inventory is not tracked every time a sale or purchase is made in periodic inventory systems, in contrast to the perpetual inventory system. At the beginning and end of the accounting period, inventory is being monitored.

A periodic inventory system involves tracking inventory for its value after a specified period of time. Every predetermined period, warehouse workers physically count the things they have in stock.

A Comparison of Periodic and Perpetual Inventory Systems: Key Differences

Now that you know what each is, it’s time to understand the main differences between perpetual inventory systems and periodic inventory systems. Both have advantages and disadvantages that should be taken into account when deciding which is best for your company. The distinctions between perpetual and periodic inventory systems, as well as their benefits and drawbacks, are as follows:

Perpetual Inventory Systems: Pros & Cons-

Pros:

Cons:

Keeps track of all inventory records continuously and records each sale or other transaction. When a sale is made, two journal entries are made. Eliminates the need for a closing entry Able to predict and reorder products easily. It is often used by companies with a large number of stocks, such as supermarkets or office-supply stores. Provides inventory control due to “live tracking.” Loss, theft, and damage errors are easier to detect.

Technology is costly and needs skilled workers. It demands a physical inventory count once a year. Inventory software is necessary.

Periodic Inventory Systems: Pros & Cons

Pros:	Cons:
Tracks inventory levels on a regular basis, whether weekly, monthly, quarterly or annually. When a sale transaction occurs, a single journal entry is made. Requires no inventory software. Often used by companies with little inventory, including jewelry stores and museums, and galleries. Cheaper and less labor-intensive	Difficult to spot mistakes and inconsistencies, such as theft, loss, and damage. Inventory volume is unknown until the accounting cycle is over. Must have a closing entry. Hard to predict and replenish products. Inventory control is provided to a limited extent.

Which One is the Best option for your Business?

• Which system you should choose in the discussion between the periodic inventory system and the perpetual inventory system depends on your conditions. As mentioned above, both perpetual and periodic inventory systems offer advantages and disadvantages, and your business will decide which to use.
• The fundamental reality is that a physical inventory count is necessary in order to maintain accurate inventory levels. At various locations, 40% of large businesses will employ a perpetual inventory system; nevertheless, at their core, they will use a periodic system.
• Scalability is an additional element. You might use the perpetual inventory system for simple inventory management if your business has been gradually growing and regular inventory counts appear complicated.
• A perpetual inventory system may make things easier for e-commerce businesses that sell on many channels, manage various warehouses, and aim to go omnichannel.
• You will eventually need to conduct a physical inventory count, regardless of the size of your business.

Your decision should be based on the characteristics of your company, your needs as a supplier, and your objectives. You may be content with a standard periodic physical inventory count, and that is completely acceptable. However, the perpetual plus periodic inventory approach is for you if you want your income vs. time chart to expand rapidly while also generating customer satisfaction.

Conclusion

The two types of inventory tracking systems that organizations most frequently use are perpetual and periodic. Both enable businesses to understand their inventory and manage proper accounting records. However, because perpetual and periodic inventory systems may function differently for various kinds of businesses, it’s crucial to understand the differences between them. You’ll be able to concentrate on your business with confidence knowing that you maintain a proper record of what enters and exits your doors if you have this guidance at your fingertips.