Perpetual Inventory

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

Example

The following journal entries mentioned below are used to record transactions in perpetual inventory system:

Purchase of 100 unit of inventory for $ 500.

Particulars Dr Cr
Inventory 500
Account Payable 500

How to record freight cost of $ 60 associated with delivery of inventory?

Particulars Dr Cr
Inventory 60
Account Payable 60

For recording the sale of $ 1500, including cost of inventory of $ 560 (Recorded above)

Particulars Dr Cr
Accounts Receivable 1500
Sale 1500
Cost of Goods Sold 560
Inventory 560

 

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