Recording inventory transactions such as inventory purchases may be simple or complex, given the size of a business and the resources available to the accounting department. The needs of financial statement users, along with applicable accounting standards, also factor into the recordation process. The perpetual and periodic inventory systems are viable options for recordkeeping purposes, and each system has advantages and disadvantages.
Perpetual Inventory System
If a business needs a system that tracks physical inventory purchases in real time, then perpetual inventory systems are the best choice. These systems provide reporting on inventory cost, inventory balances, inventory purchases and the purchases account, when decision-makers need the information the most. Perpetual systems typically involve automation when recording costs, however this is not always the case. Accountants and bookkeepers may be responsible for recording invoices and other important data on a daily basis, to meet reporting requirements of the company.
Periodic Inventory System
Periodic systems are just the opposite of perpetual systems. Instead of sinking resources into the real time recording of inventory transactions, data is tracked on a periodic basis. Source documents are batched at regular intervals and are entered into the general ledger system. However, these batches are prepared to keep transactions in the right accounting period, especially when using the accrual basis of accounting. Periodic systems may be easier for smaller accounting departments to maintain, especially if there is a lack of resources or automated reporting.
The largest difference between the two systems is the timeliness of reporting. Under the perpetual system, users can review cost of goods sold data in real time. Purchases are recorded immediately allowing for interim analysis of financial statements and adjustments to inventory accounts, if needed. The periodic system is less timely, but it doesn’t mean that financial records are less accurate when they are prepared at month-end or year-end. Both systems facilitate a physical count of inventory, but the perpetual system makes it easier to perform during interim periods.
The resources available to businesses and accounting departments directly impact the use of perpetual or periodic systems. Often-times companies with fewer resources opt for the periodic system, because they can allocate work proportionately, when scares resources are best utilized. Below are specific advantages of each inventory system.
- Real time reporting and analytics
- Better managerial oversight and control
- Quick identification of errors and oversights
- Accurate interim financial reports
- Better control over purchasing function
- Batch reporting
- Less resources required to maintain system
- Reallocation of resources during interim periods
- Less maintenance of computerized tracking
- Retain ability to control and track inventory costs.
Recording inventory is a process that impacts financial reporting and operational effectiveness, making it important to understand the nuances of inventory management systems. Both the perpetual and periodic systems have advantages but use different approaches to valuing inventory. Auditing the cost of goods sold is key for validating both systems and is something that staff must integrate into their routines, for the inventory management system to function as designed and produce an accurate inventory account.