Periodic and perpetual inventory are methods used for stock valuation. Here are the two different methods used to keep track of the number of items they have accessible in inventory. However, perpetual inventory is more beneficial in comparison to periodic inventory and offers numerous advantages to the retailers. Although retailers and businessmen must think whether the advantages of introducing perpetual will exceed the extra cost or not!
What Is Periodic Inventory?
Periodic inventory is the process of accounting stock valuation and it is done at particular intervals.
Organizations genuinely check their inventory at the end of the time frame and utilize the data to adjust their overall record. Organizations then apply the balance to the start of the new period.
According to Wikipedia “In a periodic inventory system, no effort is made to keep up-to-date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically – usually at the end of each year. This physical count determines the amount of inventory appearing in the balance sheet. The cost of goods sold for the entire year then is determined by a short computation.”
What Are the Advantages of a Periodic Inventory System?
The advantages of a periodic inventory system are as follow:
1. Easy Implementation
Perhaps the greatest advantage of a periodic inventory system is how it is astoundingly simple to carry out. You can add this framework to your business in scarcely any time whatsoever. It is less unpleasant than some other choice for keeping awareness of your stock. Physically checking the stock is something you can in a real sense do at whatever point you feel like it. Most organizations that work with this framework will carry it out once per year. Nonetheless, you are allowed to set periodic according to your prerequisite.
2. Cost-Effective Implementation
Once more, if you need the most straightforward framework conceivable, the intermittent stock framework will be great. You don’t need to put resources into expensive software arrangements with this alternative. You don’t need to contribute a lot of anything, aside from the time associated with taking an actual stock. Besides, as long as you will invest that effort, your expenses are never in fact going to go up by the same token.
3. Good for Small Businesses
As you can envision, private ventures are maybe the best fit for a framework like this. We’re discussing 1-2 individuals, a restricted stock, and a couple of dozen orders set consistently. Bigger organizations can utilize this framework, as well, yet things can normally get more confounded when we begin discussing different workers, and a great many orders each year. Complications arise when organizations grow.
What Is Perpetual Inventory?
Perpetual inventory keeps accounts of inventory records with the help of a computerized system or inventory management software. Within the software, you can see all the changes that have been made in detail.
A perpetual inventory system automatically updates records as the inventory is purchased or sold. It keeps all the information in real-time. With this software in place, you easily avoid theft or inventory misplacement. If anyone tries to theft the system will automatically know.
What Are the Advantages of a Perpetual Inventory System?
The advantages of a perpetual inventory system are as follow:
1. Centralized Inventory System
When information is centralized team is better to engage situations. For instance, if there are multiple warehouses for storing stock you can adjust the stock with other warehouses. It is effective for inventory management. Managers can see stock movement at anytime or any location.
2. Avoid Stock Issues
Stock issues such as overstocking or out-of-stock are common issues however they are dangerous for business. When a business does not have stock to sell then obviously the potential loss of customer will occur and if you buy stock in excessive quantity and stock is not purchased by customers then you jeopardize your business.
That is why it is better to maintain a balance between these issues stock shall be neither too much nor too little. A perpetual inventory system helps in doing so it avoids out-of-stock issues and avoids too much stock purchasing as well.
3. Set Reorder Point
When inventory is essential for business then you cannot ignore inventory work. You mustn’t run out of stocks. To avoid these issues, you can set a re-reorder point it means the software will keep track of inventory in numbers.
Whenever the inventory goes below the defined inventory level it will alert the responsible for inventory and then the refilling inventory stock process begins. You can apply this strategy to each inventory.
What Are the Differences Between the Periodic and Perpetual Inventory System?
The differences between Periodic and Perpetual Inventory system are discussed below:
- Periodic inventory is good for small-scale businesses whereas perpetual inventory is good for high sales volume retailers or big & medium size organization.
- In periodic inventory physical count is done to measure the inventory level whereas perpetual inventory is updated continuously.
- Periodic is a manual process whereas perpetual is automated.
- Periodic physical verification is used whereas perpetual verification is based on book records.
- perpetual inventory is updated continuously whereas Periodic inventory is updated occasionally.
- periodic inventory is economical whereas perpetual inventory is expensive.
- In periodic inventory, the business operation may not be stopped to know exact inventory numbers whereas the perpetual process does not need to be halted.
The periodic inventory system is economical compared to the perpetual inventory. However, the perpetual inventory system is more accurate than the periodic inventory system. Plus, it is less prone to error and it allows to set re-order for inventory.
The perpetual inventory system is used with asset management software so that more effective outcomes can be produced.
Asset management software provides great advantages to the organizations such as accurate tracking, inventory reports, and these reports help identify the pattern of sales. Furthermore, with the help of data you can track trends as well that may help in growing sales and it can also assist in planning future goals.
Frequently Asked Questions (FAQs)
When inventory count is going it hinders other activities of the business that is why counting needs to be finished as quickly as possible. Inventory theft chances are increased in this activity. These are a few of the disadvantages of periodic inventory.
The disadvantage of a perpetual inventory system is that it is expensive as it needs computer software, barcode tags, and scanners, etc. Furthermore, if inventory is spoiled or broken then it will be not accountable because the errors can be found during physical count only.
There are several benefits of asset management software such as:
1. Eliminating spreadsheet error
2. Increasing productivity
3. Detailed reports and analysis
4. Eliminating ghost assets
5. Effective auditing
6. Accurate asset and inventory tracking
7. Efficient inventory management