The most important factor that companies need to keep watch is inventory management. Usually, companies use two accounting methods to determine the number of goods sold and remaining in the stocks. They are namely called " Perpetual Inventory System" and "Periodic Inventory System." Perpetual Inventory System helps to keep a record of the purchased goods and the cash flow analysis in real-time. The perpetual system is a computer-based system that uses the point-of-sale (POS) for keeping records of the inventory. It also uses enterprise inventory management systems. However, a periodic system is used to physically count the inventory and cost-of-goods-sold (COGS) in various intervals. Both systems are used to manage inventory, but there are some basic differences. So, let’s understand the key difference between perpetual inventory vs periodic inventory.
Definition of Perpetual Inventory System
As discussed above, the Perpetual Inventory System is a computerized system. It allows businesses to use POS (point-of-sales) and inventory management technology. Using these technologies, companies can easily track the inventory at regular intervals. It helps to minimize the problem of physically counting the inventory. The reason is that all the data are fed directly into the ledger, including COGS (Cost of Goods Sold), in real-time. COGS is an important accounting element that helps to find out the gross margin of the company. Following the balance sheet, you need a specific formula to calculate the accurate value. Here, the cost of inventory purchase is added to the beginning balance of the inventory and then subtracted from the ending inventory. And the Formula for Cost of Goods Sold (COGS) is below.
COGS = Beginning balance of inventory + cost of inventory purchases - cost of ending inventory
In a perpetual inventory system, every product is assigned a barcode to scan and track the product movements. Barcode inventory helps to update the ongoing process of the goods sold and the remaining stocks in the warehouse. The best inventory management software, like TranZact, allows you to maintain a separate ledger. It keeps the businesses informed about the purchased goods, COGS, and stocks. If we compare perpetual inventory vs periodic inventory, perpetual is simpler than the periodic system. But the disadvantage is it is an expensive inventory system. The reason is that companies need to install the infrastructure and even need to maintain them. However, setting up the whole system is a one-time investment, which makes the monitoring process easy in the long run. Though perpetual inventory seems expensive, it can be cost-effective in the long run. As products are barcoded, you can get detailed information on every movement. You can analyse what goes in and out of the warehouse. Also, you can accurately track your inventory unless any theft or damage occurs.
Definition of Periodic Inventory System
The periodic inventory system is a physical operation. It helps to keep track of available goods in the warehouse. In this method, the workers physically count the goods without using a computerized system to follow the workflow. This system is usually used by SMEs or businesses that don’t have money to set up expensive infrastructure. If we compare perpetual inventory vs periodic inventory, a periodic inventory system is best for companies that deal with small amounts of goods. They use physical count to measure their inventory and the cost-of-goods-sold (COGS) occasionally. Usually, companies use a periodic inventory method quarterly, twice, or once a year. Here, the workers count all the inventory at the end of the period after in and out of the goods. After this, the data is moved to the inventory management account to keep records of COGS. The record is then used at the beginning of the new period, and the cycle keeps on repeating. On one side, a periodic inventory system is an effective way to maintain inventory balances. On the other hand, physical counting is difficult and time-consuming. It is difficult to determine the direct manufacturing cost, labour cost, and overhead cost that directly affect the inventory using physical counting. The workers usually tend to make errors while accounting. In such a condition, cloud-based solutions offered by TranZact will be really helpful. The software allows you to effortlessly record your COGS and inventory. TranZact cloud-based software helps you automate your inventory management system. You can also calculate your purchased and sold goods accurately.
6 Key Differences Between Perpetual and Periodic Inventory Systems
Perpetual and periodic inventories are both used to maintain the inventory. They help to closely monitor how many goods are purchased, sold, and stocked. Other than their operational methods, costing, and implementation, they are a bit different from each other. Let's see the key difference between perpetual and periodic inventory systems.
1 In Calculating The Cost-Of-Goods-Sold (COGS)
COGS is an important factor to consider when you compare perpetual inventory vs periodic inventory.
- In inventory accounting, the perpetual system allows you to keep continuous and real-time records. You need to update your inventory every time a product is sold or purchased.
- At the same time, the periodic system involves a manual count of inventories. It is typically conducted in regular intervals (i.e., monthly or yearly) while calculating the COGS.
2 While Keeping Records
There is also a slight difference while keeping the record in inventory management.
- The perpetual system uses POS (point-of-sales) and inventory management software. It allows you to track detailed information about the goods in real-time.
- When it comes to the periodic inventory system, it is not updated continuously. Instead, it allows adjustment after a specific period.
3 Cost Of Implementation
Under a perpetual inventory system, point-of-sale (POS) devices are often used. It also uses enterprise asset inventory management technology that makes it expensive to set up. Thus, it is often used only by big companies for warehouse automation to track each good. On the other hand, the periodic method uses the physical count to count the COGS. It makes the periodic inventory method comparatively less expensive.
4 In Terms Of Accuracy
Another difference between a perpetual inventory system and periodic inventory system is accuracy.
- Perpetual inventory is comparatively better at providing accurate data. This method uses barcodes and other tools that allow companies to maintain the record accurately.
- On the other hand, while using a periodic system, the workers can make mistakes. The reason is that you need to follow a manual process for everything.
5 In Terms Of Complexity
- Perpetual inventory system requires specialized software or systems to track inventory in real-time. So, sometimes, it can be complex to use.
- But, the periodic system does not require software. So, it makes it suitable to be used even by small businesses or manufacturers.
6 Time Taken To Manage Inventory
The perpetual inventory system allows the user to make any real-time adjustments. Such benefits of a perpetual system make the accounting process faster. Comparatively, when accounting in small businesses using periodic methods, making changes is difficult. The simple reason is that in a periodic system, the required changes can be done only in a specific period. It results in the burden of maintaining larger data at that time. Also, mistakes may happen due to following the manual accounting process and workload.
Conclusion
This is the complete analysis of perpetual inventory vs periodic inventory system. Both methods are used in different circumstances, but to keep your inventory accurate and up to date, a perpetual inventory system would be your choice. Besides, the periodic system is generally used by the SMEs to maintain smaller inventory. But it doesn't mean that you can’t automate your warehouse management. Using cloud-based software offered by TranZact can help you track your COGS in real-time. So, let's step up to introduce a cost-efficient, productive, and error-free solution to your company. Contact the award-winning TranZact team now to get extraordinary inventory management solutions.
Perpetual Inventory vs Periodic Inventory FAQs
Q1 Perpetual inventory vs periodic inventory: Which is better?
Generally, a perpetual system is considered better than a periodic inventory method. Perpetual inventory allows the business person to use computerized systems like POS technology and barcodes to handle the process.
Q2 What are the advantages of a perpetual inventory system?
Perpetual inventory offers ongoing tracking of the inventory and improved inventory management. Some other advantages of a perpetual inventory system are:
- Real-time update
- Managing multiple locations easily
- Provide detailed information about the inventory
Q3 What are the advantages of a periodic inventory system?
The periodic inventory system is simple to use and requires limited technology for managing inventory. Some advantages of periodic inventory systems include:
- Require low investment
- Simple to use
- Requires limited resources and technology
Q4 Is it necessary for SMEs to implement a perpetual inventory system?
Though small businesses handle limited goods, it can done manually. However, a perpetual inventory allows SMEs to manage even large records with accuracy.
