In previous articles, we have covered both perpetual inventory system and periodic inventory system. In this article we will cover the advantages and disadvantages of perpetual and periodic inventory system.
Typically, in a manufacturing business or a business with a physical stock, proper inventory management is necessary. Businesses need to keep track of their inventory not only to be able to order new inventory when the inventory levels are down but also for internal control purposes. Inventories in a business are generally controlled and managed by the store department who also decide on which system of inventory to use.
As mentioned above, the two systems come with their own advantages and disadvantages. Therefore, what are those advantages and disadvantages of perpetual and periodic inventory system?
Periodic Inventory System
Periodic inventory system is a mechanism to calculate the inventory and cost of goods sold of a business. The periodic inventory system performs stock valuations at regular intervals of time. These stock valuations are carried out by taking physical inventory counts of the stock at the end of every specified period.
The periodic inventory system does not keep track of every single inventory transactions but only updates inventory after a specific period of time. This system is generally used by smaller businesses that do not have the capacity and resources to implement a perpetual inventory system. This system is also suitable for businesses with minimal inventory transactions.
Advantages of Periodic Inventory System
The periodic inventory system is cost-beneficial for businesses. As there are lesser resources needed, any business can use the periodic inventory system. This is one of the main reasons the periodic inventory system is more widely used than the perpetual inventory system.
Disadvantages of Periodic Inventory System
The main disadvantage of the periodic inventory system is that the inventory records of the business are not properly updated. This deters the business’ ability to track down inventory levels and order inventory on time. Furthermore, in case of unreconciled differences between inventory in the books and physical inventory, it is more difficult to find the differences in a periodic inventory system.
In addition, businesses using this system cannot prepare management or financial accounting reports without knowing the inventory at that time.
Perpetual Inventory System
Perpetual inventory system provides a real-time of closing inventory and cost of goods sold of a business. This is because all transactions have been updated continuously. Those transactions include the purchase, production, or sales of inventor. As result of this constant updating of all those transactions, it enables a business more control over its inventories.
Under a perpetual inventory system, a business keeps track of every single movement in inventory at the time of transaction. Every item of inventory produced, purchased and sold is kept track of. This system is generally complicated and only followed by businesses that have the resources to keep track of every single piece of inventory.
Advantages of Perpetual Inventory System
The perpetual inventory system gives a business more control over inventories. As every single transaction is kept track of, a business can easily find out when the inventory levels are down and plan ahead for any purchases. Generally, businesses use digital technology to make the tracking easier.
Furthermore, the perpetual inventory system gives the business up-to-date information at any point in time. This can make producing management and financial reports easier for businesses.
Disadvantages of Perpetual Inventory System
As every single transaction of inventory is tracked and recorded, the perpetual inventory system can be costly. If a business wants to implement a proper perpetual inventory system, it needs to have dedicated resources to do so. For small businesses without the resource, this system is not feasible.
In addition, while the perpetual system keeps track of all movements in inventory, a business still needs to take a physical count of its inventory once in a while for control purposes.
Businesses with physical stocks can use two systems to keep track of their inventories, perpetual inventory system and periodic inventory system. The perpetual inventory system gives a business up-to-date information about its inventories at any point in time, however, may be considered costly for some businesses. The periodic inventory system, more widely used, can be used as an alternative to the perpetual inventory system and is very cost-efficient for small businesses but does not reflect the latest changes in inventories of the business.