Lesson 68 - Beginner accounting course

68. Perpetual vs. Periodic Inventory Systems

Inventory tracking is essential for businesses to maintain accurate financial records and manage stock efficiently. The two main inventory systems used are Perpetual Inventory and Periodic Inventory. Each system has its advantages and is suited for different types of businesses.

1. Understanding Perpetual and Periodic Inventory Systems 

2. Example: Comparing Perpetual vs. Periodic Inventory

Imagine a store buys 100 units of a product at $10 each and later sells 40 units at $20 each. Let’s see how each system records inventory and cost of goods sold (COGS).

Perpetual Inventory System

• At Purchase:

  • Inventory increases by 100 units, valued at $1,000.

• At Sale (40 units sold at $20 each):

  • Revenue = 40 × $20 = $800

  • COGS (40 × $10) = $400

  • Remaining inventory = 60 units ($600 total value)

Updated Inventory Record:

Periodic Inventory System

• No real-time updates. Inventory is only adjusted at the end of the accounting period.

• At the end of the period, a physical count determines remaining stock and COGS.

• Example Calculation:
  COGS = Beginning Inventory + Purchases – Ending Inventory

  • Beginning Inventory = $0

  • Purchases = $1,000

  • Ending Inventory (after physical count) = $600

  • COGS = $1,000 - $600 = $400

Since the system does not track transactions in real-time, businesses won’t know stock levels until the next physical count.

3. Choosing the Right Inventory System 

Key Takeaways

• Perpetual inventory provides real-time tracking, but it requires technology and investment.

• Periodic inventory is cheaper and simpler, but it lacks accuracy and real-time updates.

• Businesses should choose based on their size, budget, and operational needs.