Perpetual inventory is a technique of inventory accounting that uses computerised point-of-sale systems and asset performance management software to record the sale or purchase of inventory immediately. The perpetual inventory gives a complete perspective of inventory changes and timely reporting of the quantity of stock on hand. It precisely reflects the number of items on hand. A corporation does not make an effort to retain precise inventory records of products on hand under this system; instead, purchases of commodities are recorded in the income statement to the inventory database. As a result, direct labour and materials costs and direct factory overhead costs are effectively included in the price of goods sold.
What is a Perpetual Inventory System?
A perpetual inventory system is an inventory management strategy that uses technology to record real-time transactions of bought or sold stock. It is generally thought to be more efficient than a periodic inventory system.
The Perpetual Inventory System: An Overview
Businesses used to utilise what's known as a periodic inventory system, in which they physically counted what was on the shelves to keep track of what was in stock. They were compelled to close storefronts or departments to perform inventory or pay staff to work overtime while the business was closed to figure out what stock was on hand in many circumstances. When products are sold out, they may only learn about them from disgruntled customers or clever floor sales employees.
Thanks to automated cash registers that maintain accounts of each item sold, many firms have recently found it simple to move to a permanent inventory system. This means that firms can operate in real-time or near to it.
Perpetual vs. Periodic Inventory
The periodic inventory system uses a physical inventory count to calculate your inventory turnover and cost of goods sold. When your accounting period comes to a close, you update your accounts. You may have a monthly, quarterly, or annual accounting period.
Your inventory balances are constantly monitored with a perpetual inventory system. When you receive or sell inventory, updates are automatically made. In addition, your inventory accounts are updated as soon as you make a purchase or accept a return.
For example, a perpetual inventory system might be employed in a supermarket. Each time an item is scanned and purchased, the technology changes inventory levels in a database.
How does Perpetual Inventory Work?
When you use perpetual inventory, your inventory levels are updated automatically by the POS system. You may view your sales reports online at any time, making inventory management and purchasing easier.
On the other hand, Perpetual inventory systems are not always completely accurate. The accuracy of your business's inventory levels might be affected by a variety of circumstances. For example, it's possible that you'll forget to record a transaction or that your organization may be victimized by employee theft. Therefore, check your actual inventory quantities on a regular basis to compare totals.
Unlike periodic inventory, perpetual inventory calculations are usually done as you go rather than waiting until the end of an accounting period. Endless inventory systems are commonly used by businesses that use POS systems and sell at profit commodities to count inventory periodically.
How Do I Calculate Perpetual Inventory?
Cycle counting is used by businesses that use a perpetual inventory system to keep their records accurate. A portion of the inventory is counted every day, and the quantity is compared to the inventory records.
To compute inventory, you must build up a system in which each piece of stock is added to or subtracted from the system as it is acquired or sold.
The method functions well when sales clerks and employees update inventory numbers in the company's central accounting database using point of purchase terminals, wireless barcode scanners, and perpetual inventory software.
Advantages of Perpetual Inventory
For a good reason, perpetual inventory is the preferred approach of inventory management, particularly for firms with high-volume inventories. Here are a few of the most important:
Real-time data access
All transaction records (sales, refunds, discounts, etc.) are continuously recorded, resulting in a living database with rapid access for all stakeholders. This access enables firms to make better decisions based on the most up-to-date data across all activities. It also allows them to make periodic modifications and alterations to their business processes in order to drive continuous progress.
Micro-level data collection
Data collected at the transactional level creates a more thorough database, allowing firms to predict future situations. A more complete paper trail that aids in the identification of performance indicators makes long-term decision-making considerably easier. This results in substantially more precise demand forecasts and inventory optimization when integrated with real-time data.
Implementing a perpetual inventory system lowers the overall cost of inventory management dramatically. Although the initial setup costs may be expensive (depending on the size of your firm), recurring personnel expenses are significantly reduced by removing the need for regular manual checks and counts by employees, saving both time and money.
You can examine stock anomalies more efficiently and correctly with a constant stream of transactional data. Micro-level data collection allows you to operate with more precise inventory numbers, making it much easier to identify and mitigate shrinkage, counting errors, and theft. These disparities are easy to ignore in a periodic system because it uses a physical inventory count to balance year-end inventory and compute COGS.
Is a Physical Inventory Required While Using the Perpetual Inventory System?
Businesses that use the perpetual inventory system may choose to do a physical count of inventory at the end of the year in some cases. Physically counting each inventory item and checking it to the number recorded in the inventory system is part of this process.
Following that, the company will look into any quantity discrepancies that may occur as a result of personnel errors, theft, or destruction.
The nature of the operation and the complexity of the organisation influence whether a periodic or perpetual inventory system should be used. For example, larger companies that deal with high-value goods should use the perpetual inventory system, which involves significantly more records management and is the more advanced of the two.
Why Do Companies Choose a Continuous Inventory System?
Perpetual inventory systems were not as widely used in the past as they are now because it was difficult to accurately and swiftly capture enormous volumes of accounting data. In recent years, however, it has been demonstrated that a perpetual inventory system can mature into the desirable technological mould with improved accounting and business procedures. In addition, the widespread use of computers, software, hardware, and scanners has made a perpetual inventory system, like any other modern inventory monitoring system, less burdensome and more efficient.
Businesses with a large inventory quantity prefer the perpetual inventory method. Large enterprises may find it challenging to complete the system's colossal cycle counts hence a periodic system is often considered an onerous approach. Furthermore, a company with multiple retail locations and wholesalers may find it easier to keep track of its inventory with the help of a frequently updated database. This sort of accounting tracking is also popular among small and medium-sized enterprises, where the owners are more concerned about scalability than with anything else.
A consumer asking for a specific item that is not often requested or sold ideally illustrates a perpetual inventory system. This product may be available on a number of sites in the area. At this point, it enters the picture and assists the consumer in locating a single stock rather than forcing him to walk from store to store in search of a specific product. In scenarios like these and others like a business with a circular process of return and exchanges or a firm specialising in drop shipping, trade, and distribution, the real-time information provided by a perpetual inventory system comes in handy.
Why Use a Perpetual Inventory Software?
There is no doubt that business owners have a plethora of inventory management systems from which to select. However, there are a few features to check for in the perpetual inventory solution you're considering buying to ensure you've chosen the appropriate choice. You should be able to get some of these vital features from the perpetual inventory software you choose:
Barcoding and tagging
Using barcodes in your inventory management system can help you reduce error rates, employee training, and cycle count time.
Advanced perpetual inventory systems can translate data from every location, allowing employees to find the stock they need and firms to move products between places to save money on inventory.
Alarming insight leads to poor management, which ultimately results in poor profit and sales figures for the organisation. You may track precise sales trends for each item using contemporary perpetual inventory management capabilities to determine future demands and reduce holding costs.
For medium-to-large businesses, data security has been and always will continue to be a significant issue. Handling important financial, customer, and inventory data necessitates a well-thought-out security system, which your inventory management systems will undoubtedly deliver. In addition, for modern inventory management solutions, securing outgoing data using firewalls and other security measures is necessary.
A perpetual inventory system will provide your company with a real-time view of inventory and stock levels without the hassle of manually processing each transaction.
At the same time, the system guards against mistakes, assist you in avoiding inaccuracies and enable you to handle various locations from a single site.
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