What is perpetual inventory system?
The system in which detailed records of every transaction related to the purchase and sale of goods are kept throughout the accounting period and the amount of goods in stock at the end of each transaction is known is called perpetual inventory system. In this system, detailed records of every transaction related to the purchase and sale of goods are kept. As a result, the amount of goods in stock at any time is known and the cost of the goods sold is also known at the end of each sale. That is, in the perpetual inventory system, one does not have to wait until the end of the accounting period to know the amount of unsold inventory. Even in this system, it works even if the inventory is not counted manually. However, in the perpetual inventory system, the inventory is counted manually at the end of the accounting period and the actual count is compared with the inventory kept in the book or computer. As a result, if there is any loss, theft or incorrect record of the inventory, it is easily detected. If any shortage or theft is detected, it is adjusted against the cost of goods sold.
Perpetual inventory system is a system of accounting for merchandising transactions in which the inventory and cost of goods sold accounts are kept perpetually up-to-date.
Advantages of Perpetual Inventory System:
Perpetual inventory system is a scientific method of accounting for inventory. In which the new surplus of inventory and cost of goods sold are known after each transaction related to the product. Which is helpful in controlling the inventory of the organization. Its advantages are mentioned below:
- In this method, the amount of inventory can be known at any time or it can be said that it is possible to know the new surplus of inventory after each transaction related to the product.
- In this method, it is possible to know the amount of cost of goods sold along with the sale of each product.
- This method simplifies the control of stock products.
- By matching the stock book and actual count, the amount of shortage, damage, waste, theft, etc. of stock products can be easily known.
- It is easy to take preventive measures in case of shortage, damage, waste, theft, etc. 7. In this method, there is no need to close the business establishment to count stock products.
- Since information is available at any time in this method, it is possible to prepare interim financial statements if necessary.
- Keeping an account of stock products in this method reduces the amount of errors and fraud.
- Since the amount of stock products can be known at any time in this method, orders can be placed on time.
- Since the amount of stock products can be easily known at any time in this method, there is no possibility of purchasing additional products or product shortage.
Disadvantages of Perpetual Inventory System :
There is no doubt that the perpetual inventory system is a scientific and helpful method of controlling inventory. However, the method has some disadvantages which are as follows:
- It is quite expensive to implement as it requires a large number of employees.
- It is not profitable for small companies to implement it.
- It is a troublesome task to determine the stock of inventory after each transaction related to the product. This can cause employees to lose patience.
- It is time-consuming as regular inventory checks are carried out throughout the accounting period.