September 15, 2020

Companies with physical inventory need to track their goods. A perpetual inventory system is one popular way to do that, but it comes with pros and cons and is not the right system for every organization. Understanding whether this inventory information would help your record-keeping can help with decisions about whether this is a method ripe for adoption.

A perpetual inventory system is an accounting method that immediately records goods for a physical inventory count. The purchase or sales of your goods is recorded in real-time, using a computerized accounting system or a point-of-sale system. The purchases are recorded as debits in the inventory management system. Given the real-time nature, this inventory management system allows for an accurate physical count.

Perpetual inventory system or periodic inventory system?

The perpetual inventory system is different than the periodic inventory system for tracking inventory, and these are the two main inventory management techniques companies use. With a perpetual inventory method, items are often given a barcode. When the item is sold, barcode scanners record the item in the inventory management software. It is easy for supply chain managers to check the computer software for a real-time inventory status.

The periodic system requires staff to manually audit the stock on a regular basis to track inventory, based on the physical inventory count in storage. It’s then compared to financial statements to find inconsistencies. This is time-consuming, even more so if the company has a lot of inventory and high turnover.

What companies benefit from a perpetual inventory system?

The perpetual inventory method is great for business owners and companies with numerous inventory items and orders. Both small businesses and large businesses want to prevent a stock-out, and knowing inventory levels allows supply chain managers to maintain appropriate inventory quantities.

An often-cited example of companies that benefit from periodic inventory systems is a car dealership. Sales at a single dealership are less frequent, easy to count and track. Businesses selling jewelry or other expensive items might also want to use the periodic inventory system. They do inventory tracking not just to know what purchase of inventory took place, but to prevent the goods from being stolen. Even small businesses might use a computerized point-of-sale system, which helps track goods, even if they manually count the high priced items. Audits might be done toward the end of an accounting period.

Accounting departments and cost of inventory

The accounts receivable department tracks the cost of inventory, and the chosen inventory management method helps them do this. The accounting records and inventory records must track inventory available for sale, inventory cost, and cost of goods sold. The methods rely on when the inventory cost is recognized by the accounting records and when they’re posted to the cost of sales journal entries. One method is first in first out (FIFO), which presumes that the oldest units were sold first. Another method, last in last out (LIFO), presumes that the most recent inventory was sold first. Instead of FIFO or LIFO, companies can use a weighted average cost method instead, which divides the number of product units in inventory by the total inventory cost.

Small businesses and other companies pay attention to their purchases account, which tracks the inventory purchases they made. That includes beginning inventory, which is the cost of inventory at the beginning of an accounting period. The inventory in that counting might include unsold goods held over from the prior period. And they also track ending inventory, the value of items unsold at the end of the accounting period.

If you’re an e-commerce company working with a fulfillment warehouse, you’ll want to better understand how they track inventory, and how their system can work with yours. Stord provides end-to-end visibility for customers, so they can see their goods throughout the supply chain. We can make the process easier for you.