The Perpetual Inventory System is a system of records maintained by the store department which reflects the physical movement(i.e. receipt and issue) of stocks and their current balance.
A perpetual inventory system is commonly used in practice because it provides more timely information to managers for decisions relating to controlling and planning inventory.
A perpetual inventory system may be used in a manual accounting system. However, if there are many inventory transactions, such a system is costly and time-consuming.
In almost all cases, perpetual inventory systems are computerized.
Computerized perpetual inventory systems are useful to managers in controlling and managing inventory.
For example, fast-selling items can be reordered before the stock runs out. Sales patterns can also be analyzed to determine when to mark down merchandise or when to restock seasonal merchandise.
This system consists of the following three things;
- Bin cards
- Stores ledger
- Continuous Stocktaking
1. Bin Card
Under the perpetual inventory system, We record stock balances after each receipt and issue in Bin Card.
A bin is a rack, container or space where goods are kept.
For each kind of material, an inventory tag is attached to the bin. This tag is called Bin Card.
This facilitates regular checking of stock verification physically which obviates the stopping of the work for stocktaking.
There will not be a stoppage of production in case of continuous physical stock verification.
2. Stores ledger
Stores department maintains a record called stores ledger in which a separate folio is kept for each item of stock. It records not only the quantity details of stock movements but also records the rates and values of stock movements.
In the perpetual inventory system, stores ledger is immediately updated after each receipt and issue of stock.
3. Continuous Stocktaking
The continuous physical verification of stock is an essential feature of the perpetual inventory system.
Continuous stocktaking is a method verification of physical stock on a continuous basis instead of at the end of the accounting period.
The verification is conducted round the year to cover each item of stock twice or thrice.
A certain number of items should be counted, weighed or measured daily and compared with the Bin Card balances.
A company has 4500 items of stores. In a year of 300 working days. 15 items should be counted, weighed or measured daily so that all 4500 items are verified physically once a year and compared with the Bin card balances.
Advantages of Perpetual Inventory System
- This system avoids the disruption to production or trading caused by the periodic stocktaking.
- This system facilitates production planning and inventory control.
- It is efficiently maintained with continuous stocktaking.
- Perpetual Inventory System avoids the necessity of stocktaking by the actual count at the end of the financial period
- It helps in having a detailed and more reliable check on the stock.
Disadvantages of Perpetual Inventory System
- Businesses that sell a large number of low‐cost items often find the maintenance of perpetual inventory records for all types of inventory too costly and time‐consuming to be practical, unless they have access to a computerized inventory system.
Differences between Periodic and Perpetual Inventory System
|Perpetual Inventory System||Periodic Inventory System|
The perpetual system continuously updates the inventory asset ledger in a company's database system, giving management an instant view of inventory
The periodic system is time-consuming and can produce stale numbers that are less useful to management.
The perpetual system keeps updated COGS as movements of inventory occur.
The periodic system cannot give accurate COGS figures between counting periods.
The perpetual system tracks individual inventory items so that in case there are defective items—for example, the source of the problem can quickly be identified
The periodic system would most likely not allow for prompt resolution.
The perpetual system is tech-based and data can be backed-up, organized and manipulated to generate informative reports.
The periodic system is manual and more prone to human error, and data can be misplaced or lost.