Perpetual Inventory System

In essence, the definition of the system is in its name itself. It involves constantly checking if any transactions have taken place through the billing process, not allowing any place for false recording or inadvertent mistakes. Here's why this is a pretty efficient process.

Explaining Inventory Valuation

In the periodic inventory system, the inventory would be calculated once in a month, or 6 months or a year. Periodic means that the inventory would not be continually on watch, but instead, would be assessed periodically, the period being pre-decided by the company.

The inventory is continuously (perpetually) being assessed. This is basically because the treatment of the various transactions of purchase and sale directly affects the inventory in bookkeeping.

Let us take the example of a mall. The business model of the mall works on a resale basis i.e. whatever inventory comes in from the dealer is sold to the final customer without any processing. The perpetual system, you will find works best in such a case. Now in the periodic inventory system, you would have a book of purchases from the individual dealer and a book for recording cash sales to customers. You would also have a book monitoring the inventory value periodically depending on the inventory valuation method which your company follows.

Let us now contrast this with the perpetual inventory system. In this system, the individual books for sales and purchases are done away with and there is only one book, recording the inflow and outflow of the goods, known as the merchandise inventory account. All the purchases for each day are recorded on one side of the book and all the sales on the other side of the book. The account is balanced at the end of each day which yields the inventory position for the day.

Features of the Perpetual Inventory

It is best suited for the sort of enterprises that usually keep a high inventory and have a high turnover. It is also well suited for the type of industries where there isn't much processing to do, so the inventory exists at only one level (for sale) rather than at three levels (raw materials, work in progress and for sale). It is well suited for the fact that inventory checking is an important part of the operations of this industry.

Furthermore, it is further aided by the presence of RFID checkers. These RFID checkers make the inventory calculation and recording purchases and sales easier and eliminate the need for manual checking at regular intervals. Of course, one cannot avoid situations where there may be a theft or unaccounted spoilage or a system failure which may send the thing into a disarray and manual backup may be called for.

As you can see, the basic difference between the periodic and the perpetual inventory systems is that in the latter, the inventory is always kept a close watch on, due to the accounting system and company policies.