Difference Between Periodic And Perpetual Inventory System

Tuesday, 23 Feb 2021

Inventory is a pre-requisite for any business in Melbourne selling goods and finished products. Management of the stock is a vital part of the bookkeeper’s job profile as it involves placing orders for fresh materials, getting them stored securely, and tracking their processing.

The raw material is the most significant asset for companies that are inventory-intensive businesses. The supply should be balanced, and the stock must be protected from damage at all times. Also, deciding the right price for the fresh materials and negotiations with suppliers is the responsibility of bookkeepers in Melbourne.

Most of them utilise the periodic or the perpetual inventory system to cover these essential functions and manage them effectively. As the name suggests, the perpetual system requires continuous stocktaking, and periodic requires an occasional physical counting of the stock.

However, very few entrepreneurs in Melbourne are aware of the distinctions between the two systems. So here is a rundown on how they are different from each other and which system is more suited for your business.

Periodic Inventory System

In the periodic inventory management system, the bookkeeper physically counts the stock but only once in a while. For example, physical stocktaking at the end of every quarter or the year.

Since the inventory is not recorded in a transaction-by-transaction method, it becomes quite challenging to track the items sold and identify the accounting errors frequently. There is no control over the individual units in the inventory. It can be expensive if it is done more than once a year and the only time to identify an error is at the end of the accounting period.

Perpetual Inventory System

It requires continuous recordkeeping, so every time an item is added to the stock or sold to the customer, it gets registered by the bookkeeper. If any product gets returned by the client, it is also recorded immediately in the system with the help of software, which tracks the stock in real-time.

In this system, there is complete control over every unit in the stock with the help of an inventory ledger, which is always up to date. The ledger is used to keep a record of the receipts and the issue of stock units and the closing balance comprises the inventory in hand. The closing inventory is determined by adding the initial inventory and receipts and then subtracting the issues from it to get the inventory balance.

Differences Between the Two Systems

Let us look at the key differences between the two systems which should be known to entrepreneurs in Melbourne.

1. Recordkeeping

As stated above, periodic inventory management is done physically without the help of any computer systems. Thus, it is done after a specific timeframe. Small businesses in Melbourne which do not have many sellable products or low movement of stocks can rely on this system.

On the other hand, businesses which have to deal with an enormous amount of stock being moved and supplied everyday need to have a digital system in place to record every transaction. Companies which cannot depend on manual counting should utilise the perpetual inventory management system.

The periodic system requires manual labour and disrupts business operations during the time of valuation. Conversely, the digital system does not interfere with the other work taking place in the organisation and keeps working without fail.

2. Tracking Purchases

The periodic inventory system records only a single entry in the asset account for the entire stock when it is purchased. There is no record of the individual units. In the perpetual inventory system, a good bookkeeping company keeps a record of the entire stock bought by the business in Melbourne along with item-based documentation and is recorded in the finished stock account.

3. Documenting the Sales

When the products are sold, the periodic system requires only a single entry displaying the sales amount. On the other hand, the perpetual system requires the bookkeeper to make two entries that include the sales amount and the cost of the goods sold.

Cost of the goods sold is the expense the business has to bear in order to manufacture, transport, store and manage the goods that are sold in a specific period. It is required to calculate the gross margin and is also taken into consideration by banks and money lenders in Melbourne when the entrepreneur applies for a business loan.

4. Cost of Goods Sold

In the periodic system, the cost of goods sold is determined at the end of the accounting period while in the perpetual system, the cost of goods sold account is updated consistently with every sale.

Business owners in Melbourne who do not track individual items in their inventory calculate the cost of goods sold by adding the initial stock with any additional stock purchased later and then subtracting the value of the ending stock from it.

The bookkeeper plays a significant role in calculating the values of the initial, additional, and ending stock by tracking the purchasing and manufacturing expenses of every order, labour costs associated with it, and the time the stock is kept in storage.

5. Recording Closing Entries

In the periodic system, the bookkeeper has to make closing entries to provide the total cost of goods sold and calculate the stock on hand to update the inventory management system. However, with the perpetual system, no such work is required because it gets updated consistently.

6. Examining Transactions

If the bookkeeper identifies an inaccurate transaction record, it is not possible to check where it occurred in the periodic system because there are no details of the individual units. Thus, if there is any shortage due to damaged goods or loss of items, they can be tracked quickly, and steps can be taken to get the units replaced without any delay.

On the other hand, with the perpetual system, it is easy for the entrepreneur in Melbourne to determine the discrepancy as there is a log of every transaction at the unit level, which can be checked and assessed effortlessly.

In addition, cycle counting is also not possible with the periodic system as there is no way of getting the correct count of inventory in real-time with a manual counting system.

Conclusion

Inventory is the lifeblood of an organisation, and it must be organised and assessed accurately for its effective management and utilisation. Your bookkeeper in Melbourne is the right person to take care of the task. However, as an entrepreneur, you must be aware of the inventory system being used and how it works.

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