Perpetual Inventory Definition
Perpetual inventory refers to a technique of accounting for inventory which records inventory purchase or sell immediately via the use of enterprise asset management software and computerized point-of-sale (POS) systems. The perpetual inventory provides an intricate view of changes in inventory with instant reporting of the inventory amount in stock, and precisely shows the level of goods on hand.
A Little More on What is Perpetual Inventory
A perpetual inventory system is higher than the previous periodic inventory system in that it allows for instant tracking of inventory and sales levels for individual items, helping to avoid stock-outs. A perpetual inventory doesn’t require manual adjustment by the company’s accountants, except to the point it differs from the physical inventory count as a result of breakage, theft, or loss.
How Perpetual and Periodic Inventory Systems Work
A POS system causes changes in inventory levels when inventory is reduced, and the cost of sales, an expense account, is increased anytime a sale is made. Inventory reports can be accessed online whenever, making it less difficult to manage inventory levels, as well as, the cash needed for purchasing more inventory.
A periodic system needs management to end business and physical counting of inventory before posting accounting entries. Businesses into the sale of large dollar items like jewelry stores and car dealerships must often count inventory, but such firms maintain a point-of-sale system as well. The inventory counts are carried out often to avoid asset theft, not for inventory level maintenance in the accounting system.
Factoring in Economic Order Quantity
Using a constant inventory system simplifies the use of economic order quantity (EOQ) by a company to buy inventory. EOQ is a formula used by managers to determine when to buy inventory, while EOQ considers the cost of holding inventory, and also the firm’s cost of ordering inventory.
Examples of Inventory Costing Systems
Companies can pick from various methods to account for the inventory cost held for sale, but the total cost of inventory expensed is the same utilizing any method. The difference existing between the methods is the timing of when the cost of inventory is recognized, and the inventory cost sold is posted to the cost of the sales expense account. The first in, first out (FIFO) method assumes the previous units are sold off first, while the last in, first out (LIFO) method records the latest units as those sold first. Business can simplify the process of inventory costing by utilizing a weighted average cost, or the total inventory cost divided by the number of inventory units.