Are you a product-based brand or business? Are you having a hard time calculating the inventory? Are you unable to track the available products in the inventory?
Inventory tracking is no joke, but there are various inventory valuation methods to help, but again, it’s impossible to choose a better one with long-term outcomes. Now that brings us to the perpetual inventory system and periodic inventory system, which are two standard methods for tracking the available products. In this blog, we are sharing the difference between periodic and perpetual inventory systems, periodic vs perpetual inventory, along with their pros and cons so that you can make a suitable choice.
What Is The Periodic Inventory System?
To begin with, periodic inventory systems are designed to evaluate the inventory for the financial reporting functions (it’s the first method). With this method, the inventory’s physical count is checked and involves
- taking inventory data at the beginning of a certain period,
- adding new items or purchases, and
- removing the depleted inventory to calculate the costs of sold goods (COGS).
That being said, the business won’t know the accurate COGS or inventory levels until the counting is complete.
A periodic inventory system might be acceptable for the business where the SKUs are lower and if the business belongs to slow-moving markets. It is actually a software system that can support taking the count of inventory at specific periods. The company can import the numbers within the software, opt for a physical product review, and import the remaining data for reconciliation purposes. To illustrate, this system works on the stock-keeping method.
Read more about Dynamics AX inventory management here.
It is suitable for getting paper-based inventory lists, calculating the data for ordering more productions, importing the stock information, and reconciling the inventory for a new period. The businesses can also export the reports and data to the accounting system, and it’s suggested to check the product requirements and needs for finding the right software. With the periodic inventory system, you will be able to see the recorded inventory costs based on the last count (nope, it doesn’t update with sales).
This is because the companies are required to register their sales within the purchasing account, and it will make the journal entries according to transactions. As far as the features are concerned, the periodic inventory system helps customize the reports, such as journals not needed, journals created, modified transactions, and error-based reports. Moreover, there are user-based accounts for setting a different combo of subsidiaries and books. Also, the software roles can be customized.
Advantages of Periodic Inventory System
- Convenient Implementation – The periodic inventory system is the easiest to implement, and one can add it to the business, irrespective of the business scale and what the business is going through. Also, it is easier than other inventory control and calculating software systems. For the most part, these businesses use the software once a year, but it still does the job efficiently.
- Cost-Effective Implementation – It’s undoubtedly a convenient system, and another benefit is cost-effective availability. That being said, there is no need for a huge investment, but you have to invest time in calculating the inventory physically.
- Suitable For Small Business – Since this software works with physical inventory counting, it is better for small businesses with limited inventory and products to calculate. Sure, a large-scale business can use it, but physical counting might get too complicated for them.
- Low Staffing Needs – The periodic inventory system doesn’t require much effort, making it suitable for brands with limited inventory. Moreover, you don’t need much staff for handling the software (one person can easily import and export the data)
Disadvantages of Periodic Inventory System
- Errors In Counting – The software is used in different periods between the inventories. For this reason, the businesses need to estimate the COGS and see which products are available and in how much quantity. However, this calculation might have errors.
- Multiple Adjustments – During the stock-taking periods, you have no features to calculate the outdated products and losses. As a result, there will be expensive adjustments after taking the physical inventory count.
- Impossible Scaling – The periodic system doesn’t provide enough room for growth because it revolves around tracking the inventory. However, scaling can be challenging because the businesses keep growing, and products are constantly added to the inventory.
How Do The Periodic Inventory Systems Work?
With this system, businesses cannot keep track or record changes. Similarly, the annual purchases are recorded within the purchase account, also known as ledger listing. However, after the year ends, the physical count calculates the ending balance and COGS.
What Is A Perpetual Inventory System?
Contrary to the periodic inventory system, the perpetual inventory system constantly tracks inventory levels, and the updates are automated. The data is automatically updated whenever the products are purchased by the customers or are sent by the suppliers. This is the most accurate system and delivers precise information as long as the products aren’t damaged or stolen. Moreover, COGS is also constantly updated with every sale.
It uses digital technology to track the inventory and uses updates sent to the central database (yes, electronically). The most common perpetual inventory system example is the system used in grocery stores since it updates the inventory levels within the database as soon as the products are paid for and the barcodes are swept. It will constantly update the asset ledger within the database system, which provides companies with an instant view of the inventory.
The perpetual inventory system keeps updating the COGS with the changes and modifications in the inventory. It can track each and every item and can also identify broken, stolen, or defective products. The best thing about this system is that it has tech configurations which means you can make data-based reports, back up the data, and eliminate the chances of errors. It can seamlessly track every business transaction and record the product information, such as storage and dimensions.
Read how the dynamics AX expense reporting app can help you track inventory expenses.
The perpetual inventory system is in-depth and sophisticated compared to a periodic system because it can constantly keep track of the inventory and update the record through POS. However, the staff might be needed to perform day-to-day recordkeeping. Moreover, the perpetual inventory system allows businesses to import a new applet for tracking the business’s availability and profits. In case of product damages, loss, or theft, the updates must be recorded instantly.
Advantages of Perpetual Inventory System
- Accurate Financial Data – The system provides updated information about COGS and provides a clear view of business profitability and sales throughout the year. It’s a suitable choice for businesses that need to keep financial records for lending and banking purposes.
- Identified Mishaps – The perpetual inventory system can outline the stock and share when the stocks are running low while providing COGS and inventory values information. That being said, it can trace inventory shrinkage, theft, differences in inventory levels, calculate errors instantly, and modify the records.
- On-Time Stock Values – Since it provides accurate reports about COGS and stock values, the perpetual inventory system will prevent the hoarding of slow-hoarding inventory. For instance, it can accurately calculate the stock turnover ratio, which is about measuring the effectiveness of inventory management. As a result, the businesses have insights into the customers’ preferences.
- Easier Inventory Management – The stock and inventory quantities can be recorded in real-time. This will ensure that businesses can run the reports to identify the slow-running products or identify the inventories that are running low, which eventually prevents the chances of getting out of stock.
- Easier Management Across Different Locations – These systems empower large-scale businesses to operate at various locations and track the inventory levels at one place, promising the delivery of accurate information. In simpler words, the central facility will have inventory-related information.
- Well-Informed Forecasting – The system helps understand the customers’ purchasing patterns, allowing businesses to make value-based and well-informed inventory stock forecasts. For instance, the businesses will have accurate information about the inventory level to create and launch future strategies accordingly.
Disadvantages of Perpetual Inventory System
- Expensive Price – The perpetual inventory systems are one of the most expensive ones and use a wide range of technologies to operate. Moreover, it requires various hardware devices, such as barcode scanners, a proper computer system, and related software to ensure seamless operations. Not to forget, updating the software will be expensive, and you will need to train the employees, which is nothing but an additional expense. For this reason, a small-scale business might not be able to afford it.
- Doesn’t Count The Damaged & Stolen Products – It can update the inventory levels whenever a product is sold or purchased. However, if some products are spoiled or damaged after purchase, the system won’t be able to notice until you allocate someone for a physical count.
Periodic Inventory System vs Perpetual Inventory System – The Ultimate Guide on Differences
Both of them are different inventory counting methods. After the above discussion, it’s evident that a perpetual inventory system is much more superior because it can track the transactions and data but demands you to make various decisions to ensure successful outcomes. On the other hand, the periodic systems generally don’t have connected computer systems, so you’ve to define the products and add the SKU information manually with business growth.
Read more about ERP inventory management here.
There are apparent differences between these two systems, such as the need for specific accounts and how the accounts can be updated. To provide to-the-point information about the differences, we are sharing some points below, such as;
- Purchase Accounts – Only the periodic inventory system utilizes the purchase account while they are debited to the inventory account with the perpetual inventory system. Moreover, the purchasing returns are also credits to the inventory account.
- COGS – With a periodic inventory system, COGS is calculated at the end of the period in a lump sum since it adds the total sales to the initial inventory and minuses the ending inventory. On the other hand, the perpetual system keeps constant updates on COGS.
- Sale Transactions – The periodic inventory system will record the COGS while the perpetual system keeps track of the sale value of the inventory.
- Error Tracking – It is challenging to track and identify the errors in a periodic inventory system because the information is consolidated at a higher level. On the contrary, perpetual inventory systems promise better transactional records, making tracking errors easier.
- Entry Closing – The entries only need to be closed in periodic inventory systems because they need to update the COGS and inventory. On the other hand, a perpetual inventory system doesn’t demand the closure of entries.
The Bottom Line
To summarize, the perpetual inventory systems provide business insights and help run slender businesses, and provide information about the business operations. Whereas the periodic inventory system is great for businesses that have limited inventory. So, it’s best to sit back, understand the business needs, check the inventory insights, and then choose the inventory system accordingly!
Who Uses a Perpetual Inventory System?
The perpetual inventory systems are suitable for businesses with higher sales volume or if they are operating at different locations.
What Is FIFO Perpetual Inventory Method?
This is the cost flow tracking software where the first inventory unit is anticipated to be the first unit to be sold and consumed.
What Is LIFO Perpetual Inventory Method?
It means that the last costs of available sales are the first ones to be removed from the system’s inventory account. In addition, it is debited to the COGS account.
What Is the Weighted Average Cost Perpetual Inventory Method?
This is a formula that’s used when the inventory items are the same or are melded.