Perpetual stock inventory system

Owned by Diane Partridge
Last updated: Oct 25, 2022

Introduction


Readysell runs a Perpetual Stock Inventory System, not a Periodic Inventory system.

The periodic and perpetual inventory systems are different methods used to track the quantity of goods on hand.


What's the difference?

Under the perpetual system, there are continual updates to either the general ledger or inventory journal as inventory-related transactions occur. Conversely, under a periodic inventory system, there is no cost of goods sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold.

The difference between the periodic and perpetual inventory systems involves the general ledger account Stock on Hand -Inventory.

Perpetual means 'continuous'. This is a system where a business keeps continuous, moment-to-moment records of the number, type and value of stock that is has at the business.

Periodic means where one does periodic inventory counts (such as once a month, or at the beginning and end of each year) and does not have an accurate record of the stock in between these points.

In a Periodic System the account Inventory (stock on hand) will:

  • have a constant balance (the ending balance from the previous period)
  • not include the cost of purchases (they are recorded in a Purchases General Ledger Account)
  • be adjusted at the end of the accounting period (so the balance reports the costs actually in inventory)
  • require a physical inventory at least once per year (and estimates within the year)
  • require a cost flow assumption (FIFO, LIFO, average)
  • require a calculation of the Cost Of Goods Sold (to be used on the income statement)

In a Perpetual System the account Stock on hand (Inventory) will:

  • be debited when there is a purchase of goods (there is no Purchases General Ledger Account used)
  • be credited for the cost of the items sold (Accrued Stock)
  • for the resale of goods purchased, the Cost of goods sold is recognized for each sale by debiting the account Cost of Goods Sold, and crediting Inventory.
  • have its balance continuously or perpetually changing because of the above entries
  • require a physical inventory to correct any errors in the Inventory account
  • require a cost flow assumption (FIFO, LIFO, average)
  • when the purchase invoice is completed the Accrued Stock will be debited causing a nett effect of 0.00 in the General Ledger Accrued Stock Account.