Describe the benefits and challenges of each system as it relates to your industry and to your business size. Compare at least one example transaction using the perpetual and periodic inventory systems (a purchase transaction, for example). Research and describe the impact each system has on your financial statements. Decide which system would be the best fit for your business, and support your decision with research.

• A perpetual inventory system automatically
  updates and records the inventory account every time a sale, or
  purchase of inventory occurs.
• Perpetual inventory accounting requires an investment in digital technology and software platforms that were out of reach for many companies in the past.
• With a perpetual inventory system, COGS is updated constantly instead of periodically with the alternative physical inventory.
• The perpetual inventory system gives real-time updates and keeps a constant flow of inventory information available for decision-makers.

If an inventory error is made in periodic systems, it may take weeks or months to find the error, and the cause may never be determined. Because transactions are automated and detailed to the unit level in perpetual systems, errors can quickly be uncovered and improvement methods swiftly implemented. A computerized accounting system – where each item of inventory is linked to the electronic accounting records – creates a perpetual system. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University.

Just-In-Time: History, Objective, Productions, and Purchasing

Here, we’ll briefly discuss
these additional closing entries and adjustments as they relate to
the perpetual inventory system. The key difference between periodic and perpetual accounting is timing. Periodic inventory is done at the end of a period to create financial statements.

With this application, customers have
payment flexibility, and businesses can make present decisions to
positively affect growth. Square, Inc. has expanded their product depreciation tax shield calculation offerings to include Square for Retail POS. The biggest disadvantages of using the perpetual inventory
systems arise from the resource constraints for cost and time.

This system allows the company to know exactly how much inventory they have at any specific time period. They just log into the system and it will tell the remaining balance. Moreover, the tracking of the cost of goods sold will be more accurate if compare to periodic. The cost of goods will be the total cost of goods being sold during the month, it not the balancing figure between the beginning and ending balance. There are advantages and disadvantages to both the perpetual and periodic inventory systems.

This accounting method requires a physical count of inventory at specific times, such as at the end of the quarter or fiscal year. This means that a company using this system tracks the inventory on hand at the beginning and end of that specific accounting period. The inventory isn’t tracked on a regular basis or when sales are executed. The periodic inventory system also allows companies to determine the cost of goods sold. A purchase return or allowance under perpetual inventory systems updates Merchandise Inventory for any decreased cost.

When to Use a Perpetual Inventory System

Sales will close
with the temporary credit balance accounts to Income Summary. Generally Accepted Accounting Principles (GAAP) do not state a
required inventory system, but the periodic inventory system uses a
Purchases account to meet the requirements for recognition under
GAAP. The main difference is
that assets are valued at net realizable value and can be increased
or decreased as values change.

On the other hand, a perpetual inventory system does not work well without automation tools. Since the system requires regular updates, manual and paper record-keeping will be hard to keep up with the changing inventory levels. Regardless of the system, Rider holds one piece of inventory with a cost of $260. The decision as to whether to utilize a perpetual or periodic system is based on the added cost of the perpetual system and the difference in the information generated for use by company officials.

AccountingTools

Note that for a periodic inventory system, the end of the period
adjustments require an update to COGS. To determine the value of
Cost of Goods Sold, the business will have to look at the beginning
inventory balance, purchases, purchase returns and allowances,
discounts, and the ending inventory balance. A perpetual inventory system automatically
updates and records the inventory account every time a sale, or
purchase of inventory occurs.

2: Compare and Contrast Perpetual versus Periodic Inventory Systems

The company’s inventory is not physically affected by the method selected. Not only must an adjustment to Merchandise Inventory occur at
the end of a period, but closure of temporary merchandising
accounts to prepare them for the next period is required. Temporary
accounts requiring closure are Sales, Sales Discounts, Sales
Returns and Allowances, and Cost of Goods Sold.

Perpetual Vs. Periodic Inventory System – Key Differences

Having more accurate tracking of inventory levels also provides a better way of monitoring problems such as theft. The use of a perpetual inventory system makes it particularly easy for a company to use the economic order quantity (EOQ) method to purchase inventory. EOQ is a formula that managers use to decide when to purchase inventory based on the cost to hold inventory as well as the firm’s cost to order inventory.

What Are the Key Differences in Periodic vs Perpetual Inventory Systems?

Periodic inventory is the system in which the company does not track individual item movement but only performs physical counts at the month-end. The business only knows the inventory quantity at the beginning and month-end, but they will not know the exact amount in the middle of the month. Moreover, the company is not able to track the daily inventory movement.