What are objectives of cost accounting state the advantages of perpetual inventory records?

Introduction of Perpetual Inventory System

Perpetual Inventory System is an accounting method that is used for recording the sale or purchase of inventory instantly and on a continuous basis by using computerized systems. Companies have a variety of options for inventory tracking. They can either use periodic inventory method, perpetual inventory method, or even a mixture of both methods.

It is an accounting method that is used for recording the sale or purchase of inventory instantlyand on a continuous basis by using computerized systems. This System helps business to maintain and update inventories on a regular basis to prevent them from overstocking, understocking. This continuous tracking of available stocks can help business in identifying inventory goods instantly that are getting out of stock. The best part of knowing that the stock is running low is that business can take immediate steps in reordering the stock before it actually gets out of stock.

Example of Perpetual Inventory System

In this system, inventory is updated in account for each transaction.

Journal Entry for PIS:

Usage of the Perpetual Inventory System

This system is majorly used by large businesses that maintains an enormous amount of inventories. These systems are even being utilized by emerging and medium sized businesses who want to scale up their business.

For Large companies, it is quite difficult and time taking to measure the inventory on a periodic basis. On storing huge inventory with the number of departments and a variety of products, it becomes quite cumbersome for business to identify products which are getting out of stock.

However, Proper and effective Inventory tracking system should be implemented by the business. Any data stored should be maintained and should be kept secure. Any data loss may result in losses to a business.

Perpetual Inventory System vs Periodic Inventory System

A periodic inventory system is an accounting method in which the amount of inventory is recorded after every accounting period or in certain intervals. A periodic inventory system records a physical count of inventories. While a perpetual inventory system is an accounting method that is used for recording the sale or purchase of inventory instantly and on a continuous basis by using computerized systems.

How a Perpetual Inventory System is different from the periodic Inventory System:

• This System records inventory on regular or continuous basis, while Periodic Inventory System records inventories on periodic basis.
• Perpetual Inventory uses a computerized system to records costofgoodssold, while Periodic Inventory method uses physical count to determine costs of goods sold.
• In Perpetual, cost of goods sold account maintain every sale while in Periodic, cost of goods sold is calculated at the end of accounting period.
• Perpetual uses real time Tracking while periodic does not.
• Financial Statements are more accurate in Perpetual Inventory System as compared to periodic Inventory System.

Advantages and Disadvantages

Below are the advantages and disadvantages mentioned:

Advantages

Some of the advantages are:

• Realtime Inventory Management: In perpetual inventory system, inventory management can be done in real time. Inventory can be recorded when purchased and when it is sold on computerized systems. This continuous tracking of available stocks can help business in identifying inventory goods instantly that are getting out of stock.The best part of knowing that the stock is running low is that business can take immediate steps in reordering the stock before it gets out of stock.
• Identification of leakage or Theft: Perpetual inventory system keeps real time track of incoming and outgoing inventory. If there is any theft or shrinkage occurs in inventory, it can easily be recorded in management system. It might not help business to know why theft happens but can provide a clue and business can take further actions.
• Lesser investment in materials:Using perpetual inventory system, business can undertake regular check on incoming and outgoing goods by keeping track of receipts and issued material. This preferablydecreases the investment in excess goods and keeping track can also minimizes the storages expenses.
• Helpful in Proper Purchases: By keeping track on inventory in Perpetual Inventory System, business can easily identify the exact quantity of each materials and can easily get an insight of which department has the shortage. This will help business in making proper purchase choices by actually identifying the needs of department.
• More Accurate Financial Statements: As periodic inventory system record inventories after a certain period probably a year, inventories on balance sheet and cost-of-goods-sold on the P&L statement are inaccuratefor the whole year. On the other hand, perpetual system gives accurate information for inventories and cost-of-goods-sold on Financial statement by continuously recording the inventory.

Disadvantages

Some of the disadvantages are:

• In a perpetual inventory system, inventory management is done by scanning the bar code or a tag of the product. After which, the product is accounted in the system. If there is any scanning error in the system than details for the product can be erroneously accounted in the tracking system.
• perpetual inventory system, items are tracked based on the details accounted in the system. If there is any loss or theft of a product that has already been accounted in the system, then unless there is a physical detection of such item has been done, it will be erroneously accounted in the tracking system.
• Similarly, if there are any breakages, a perpetual inventory system cannot identify it will be maintaining incorrect records unless it is physically checked.
• Proper and effective Inventory tracking system should be implemented by the business. Any data stored should be maintained and should be kept secured. Any data loss may result in losses to the business.
• As the system uses internet, so hacking activities are one of the major concern in maintaining such systems.

Conclusion

Perpetual Inventory System is an accounting method that is used for recording the sale or purchase of inventory instantly and on a continuous basis by using computerized systems.It helps business to maintain and update inventories on a regular basis to prevent them from overstocking, understocking.

Unlike Periodic Inventory System, a perpetual system gives accurate information for inventories and cost-of-goods-sold on Financial statement by continuously recording the inventory. As a perpetual inventory system uses the internet, so hacking activities or server downtime are one of the major concerns in maintaining such systems.

Recommended Articles

This is a guide to Perpetual Inventory System. Here we also discuss the introduction to Perpetual Inventory System along with the usage, example, advantages and disadvantages. You may also have a look at the following articles to learn more –

1. 3 Types of Inventory
2. Inventory Turnover Ratio
3. Days Inventory Outstanding
4. Days in Inventory