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What is Perpetual Inventory?

Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems & enterprise asset management software. Perpetual inventory provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, và accurately reflects the cấp độ of goods on hand. Within this system, a company makes no effort at keeping detailed inventory records of products on hand; rather, purchases of goods are recorded as a debit to lớn the inventory database. Effectively, the cost of goods sold includes such elements as direct labor & materials costs and direct factory overhead costs.

A perpetual inventory system is distinguished from a periodic inventory system, a method in which a company maintains records of its inventory by regularly scheduled physical counts.

Understanding Perpetual Inventory

A perpetual inventory system is superior to the older periodic inventory system because it allows for immediate tracking of sales and inventory levels for individual items, which helps to prevent stockouts. A perpetual inventory does not need to lớn be adjusted manually by the company"s accountants, except lớn the extent it disagrees with the physical inventory count due lớn loss, breakage or theft.

How Perpetual và Periodic Inventory Systems Work

A point-of-sale system drives changes in inventory levels when inventory is decreased, và cost of sales, an expense account, is increased whenever a sale is made. Inventory reports are accessed online at any time, which makes it easier to manage inventory levels and the cash needed to lớn purchase additional inventory. A periodic system requires management to stop doing business và physically count the inventory before posting any accounting entries. Businesses that sell large dollar items, such as oto dealerships and jewelry stores, must frequently count inventory, but these firms also maintain a point-of-sale system. The inventory counts are performed frequently lớn prevent theft of assets, not lớn maintain inventory levels in the accounting system.

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Perpetual inventory systems track the sale of products immediately through the use of point-of-sale systems.The perpetual inventory method does not attempt to maintain counts of physical products.Perpetual inventory systems are in contrast to lớn periodic inventory systems, in which reoccurring counts of products are utilized in record-keeping.

Factoring in Economic Order Quantity

Using a perpetual inventory system makes it much easier for a company to use the economic order quantity (EOQ) khổng lồ purchase inventory. EOQ is a formula managers use khổng lồ decide when to purchase inventory, and EOQ considers the cost to hold inventory, as well as the firm’s cost khổng lồ order inventory.

Examples of Inventory Costing Systems

Companies can choose from several methods to tài khoản for the cost of inventory held for sale, but the total inventory cost expensed is the same using any method. The difference between the methods is the timing of when the inventory cost is recognized, và the cost of inventory sold is posted to lớn the cost of sales expense account. The first in, first out (FIFO) method assumes the oldest units are sold first, while the last in, first out (LIFO) method records the newest units as those sold first. Businesses can simplify the inventory costing process by using a weighted average cost, or the total inventory cost divided by the number of units in inventory.

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