What is Perpetual Inventory?
Perpetual inventory is a method of accounting for inventory that updates immediately after each sale and purchase of inventory. It involves continuously tracking of stock and does not need an occasional physical count of inventory to determine the closing balance.
Advantages of Using Perpetual Inventory System
- Easy tracking of multiple items
- Provides up to date inventory balances
- Errors and mistakes are reduced to minimum level
- Reduce level of inventory counts
Perpetual vs. Periodic Inventory System
Periodic inventory system is not updated immediately (after sale or purchase of inventory like perpetual inventory) rather, records inventory on periodic bases (e.g. monthly, yearly).
|Perpetual Inventory System||Periodic Inventory System|
|Inventory and Cost of Goods Sold Account||Updated immediately after each sale and purchase of inventory.||Updated at the end of the period.|
|Purchase and Purchase Return Account||Do not use||Are only used in Periodic Inventory|
|Inventory Count to Determine Closing Balance||Do not require (because of countiniously updated stock information)||Required|
The following journal entries mentioned below are used to record transactions in perpetual inventory system:
Purchase of 100 unit of inventory for $ 500.
How to record freight cost of $ 60 associated with delivery of inventory?
For recording the sale of $ 1500, including cost of inventory of $ 560 (Recorded above)
|Cost of Goods Sold||560|