Double-Entry Accounting System

Accounting
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Describe how the perpetual inventory system works. What are some advantages of using the perpetual inventory system? Is it necessary to take physical inventory when using the perpetual system?

Nov 13th, 2014

Businesses may use two systems to maintain inventory records: perpetual and periodic. Now that computing systems that tie inventory and sales records together are widely available, most companies use the perpetual inventory system. For each accounting period, you need to determine the cost of goods sold, so you need to know the beginning and ending inventory as well as the amount of purchases made during the month.


Features

The accounting terms "periodic and perpetual imply a time for determining the amount of ending inventory,” according to Professor Thomas C. Omer at the University of Illinois at Chicago. In periodic inventories, the accounts are determined once every accounting period, usually at the end. In perpetual inventory, the system continually estimates the ending inventory. The perpetual system is a records estimating system only, and not a physical check of the inventory. Systems that use perpetual record keeping usually do a periodic physical inventory to verify their records.

Function

Perpetual inventory systems cover continuous intake of stock and up-to-date financial records. It helps you keep constant track of incoming and outgoing materials, work-in-progress and the day-to-day sales of goods. Check sales and stock records against each other frequently for accuracy.


Significance

To check validity, companies should do a physical inventory count at least once a year and compare it with the book records. This helps account for breakage, errors, theft and other loss. You compare this with the day-to-day cost of goods sold transaction records ending the same day as the physical inventory.

Considerations

Because perpetual systems do not rely on physical inventory counts, there is no need for an end-of-year entry to bring your accounts up to date. If the system is running correctly, any time you check your records, all your accounts should match. If they do not, you would first check for errors in the system and then compare it with a physical inventory to account for other mistakes or theft.


Nov 13th, 2014

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Nov 13th, 2014
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Nov 13th, 2014
Dec 7th, 2016
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