A perpetual inventory system is an inventory management accounting method designed to update all the relevant information regarding the company's accounting process. Perpetual inventory records real-time transactions that have been received or transactions related to sold stock. While this method is usually considered more efficient and handy than a periodic inventory system, it also involves updating and tracking inventory records of every item sold through technology. Here is everything you need to know about the perpetual inventory system, why businesses tend to transition to perpetual inventory accounting systems, and the advantages it brings companies.
In our Perpetual Inventory System guide, we’ll help you understand:
- What Is a Perpetual Inventory System?
- Why Do Businesses Opt for a Perpetual Inventory System?
- How Does a Perpetual Inventory System Work?
- Perpetual vs Periodic Inventory System: What's the Difference?
- What are the Advantages of Using a Perpetual Inventory System?
- Perpetual inventory system allows access to real-time data.
- It helps to create a clear paper trail on accounting paths.
- Perpetual inventory methods decrease management costs in the long run.
- A perpetual inventory system provides automated calculations.
- Demand forecasting becomes more manageable and more straightforward with a perpetual inventory system.
- At times, this system can uncover unnoticed discrepancies.
- Why Use a Software for the Perpetual Inventory Method?
What Is a Perpetual Inventory System?
The perpetual inventory method can be described as an accounting method that consists of tracking and updating a company's inventory records following a transaction. The transaction may include received goods or sold products. The perpetual inventory system involves the cost of goods sold
as well, where a sale of a stock item increases the COGS, and this action is processed through the accounting records. It allows the company to ensure that the number of things they have in their inventory is correctly reflected in the relevant account.
The perpetual inventory system definition can be defined as updating real-time transactions of sold or received the stock. It is a robust system that updates the inventory data as the transactions are made, especially compared to the periodic inventory system that uses a somewhat manual approach. We will discuss the differences between the perpetual inventory system and the regular inventory system later on.
Why Do Businesses Opt for a Perpetual Inventory System?
In the past, they did not as commonly use perpetual inventory systems as they are today since it was pretty tricky to record vast amounts of accounting information accurately and quickly as can do it today. However, recent years have shown that a perpetual inventory system can evolve into the desired technological mould with the help of enhanced accounting and business practices. Just as with any modern inventory tracking system, a perpetual inventory system has become less cumbersome and more efficient thanks to the wide use of computers, software, hardware, and scanners.
The perpetual inventory system is preferred mainly by large companies with a high inventory quantity. A periodic system is generally considered a burdensome method for large businesses that may experience difficulty performing the system's vast cycle counts. In addition, it may come in handier for a company with various retail locations and distributors to take control over its inventory with the assistance of a regularly updated database. This type of accounting tracking is also favoured by emerging businesses and medium-sized startups, where most of the time, the business owners are looking for scalability before anything else.
An excellent example of a perpetual inventory system is a customer looking for a specific product that is not commonly requested or sold. This product may have various locations in the local area. At this point, the perpetual inventory system comes in and helps identify the one stock for the customer instead of forcing him to go from store to store to locate the specific product. The real-time information a perpetual inventory system provides comes in handy in situations such as these, alongside other circumstances such as a business with a circulating process of returns and exchanges or a firm specializing in drop shipping, trade, and distribution.
How Does a Perpetual Inventory System Work?
In a perpetual inventory system, updating inventory is considered a continuous process, where the system provides an efficient and accurate way to account for records by updating the counts in real-time. A step-by-step perpetual inventory system would more or less look like this:
- Point-of-sale system updates the inventory levels: The inventory management system in charge of the POS directly processes the debit onto the main inventory once a product is sold. This process is made even more accessible and faster with barcode scanners.
- COGS is updated automatically: Perpetual inventory system and cost of goods sold go hand in hand, where the COGS gets recalculated every time a product is received or sold.
- Reorder points are adjusted: The perpetual inventory method will automatically update reorder points based on the chronological and historical data it receives. In order to keep an ideal level of inventory at all times, this data is updated according to the decrease or increase in sales.
- Purchase orders are generated: The system automatically produces a brand new purchase order once an SKU hits its reorder point. This data is then sent to the relevant supplier without the need of any human intervention or interaction.
- Products received are processes into the inventory: A warehouse employee usually is in charge of scanning the product once it has been sent to the warehouse. This way, the items appear in your WMS and are always available for purchase on preferred sales channels.
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Perpetual vs Periodic Inventory System: What's the Difference?
Perpetual and periodic inventory systems are usually interchangeably used terms since they have a similar accounting process. However, especially with the rise of new technologies within the accounting world, the perpetual inventory system has evolved into a much-preferred accounting method for big-scale businesses in particular.
A periodic inventory system is favoured by small and medium-sized companies simply because this method allows them to schedule inventory audits throughout each year. Regular inventory counts are usually conducted a few times during the year or, in some cases, at the end of each month. This method does not provide real-time inventory information, which is the biggest challenge that it offers to companies. Managers may not always have accurate inventory levels or the right amount of demand forecasts at hand, making the periodic inventory method an unreliable accounting tracking system when ensuring a lack of stock-outs.
On the other hand, a perpetual inventory system provides:
- A practical solution to precisely this issue.
- Feeding the business with up-to-date and accurate information on live inventory levels.
- The current cost of goods sold and real-time discrepancies.
What are the Advantages of Using a Perpetual Inventory System?
There are plenty of advantages of the perpetual inventory system that it offers businesses of almost any scale. The most well-known perpetual inventory system advantages can be listed as follows:
Perpetual inventory system allows access to real-time data.
This type of accounting system offers access to real-time inventory reports thanks to the continuous flow of information. Not only does this allow accurate knowledge of current inventory status, but it also provides a significant improvement in overall data accuracy.
It helps to create a clear paper trail on accounting paths.
Companies can create an extensive and elaborate paper trail by tracking their inventory movement through the supply chain. It allows them to improve supply chain management, optimize stock orders, and pinpoint bottlenecks.
Perpetual inventory methods decrease management costs in the long run.
Storage, carrying, and can significantly minimize order costs by maintaining low stock levels. Warehouse management systems that use the integrated perpetual inventory method can automate the reorders and save much-needed labour costs and similar man-related expenses.
A perpetual inventory system provides automated calculations.
Some businesses still prefer to use manual accounting methods when calculating end-of-year balance sheets. However, the perpetual inventory system regularly updates the financial records, saving companies the time and money required to conduct this process manually. A year's worth of stock data can be consolidated automatically without the risk of encountering a human error.
Demand forecasting becomes more manageable and more straightforward with a perpetual inventory system.
A perpetual inventory system is an effective means of controlling inventory that helps companies provide the analysis required to forecast future demand possibilities. While periodic inventory systems do not show the latest sale trends, therefore, the companies miss the chance of predicting the future; a perpetual inventory method helps them optimize their inventory to foresee the upcoming possibilities and profitability options.
At times, this system can uncover unnoticed discrepancies.
Companies using a perpetual inventory system can quickly determine and resolve discrepancies by merging this system with an occasional physical stock count. Shrinkage, internal thefts, and repetitive count errors can all be detected with such detailed entries.
Why Use a Software for the Perpetual Inventory Method?
It is safe to say that there are limitless inventory management systems on the market that business owners can choose. However, there are certain aspects you should be looking for in the perpetual inventory system formula you plan on purchasing to make sure you have made the right decision. The perpetual inventory software you choose should be able to provide some of these essential solutions:
Barcoding and tagging: By implementing barcodes into your inventory management system, you can minimize human error, employee training, and time required for cycle counts.
Inventory tracking: Advanced perpetual inventory systems can transform data from each location, allowing employees to locate the stock they are looking for and letting businesses transfer their products between areas to reduce inventory costs.
Reporting tools: Turnover rates, location, profit margin, costs, and product variances are the most important. Reporting tools your inventory management system has to provide you.
Forecasting: Poor insight leads to poor management, leaving the company with poor profitability and sales figures at the end of the day. With modern perpetual inventory system tools, you can track the detailed sales trends for each item to decide on future needs and minimize holding costs.
Security: Data security has always been and will always be a top priority for medium-to-large scale companies. Handling sensitive financial, customer, and inventory information require a delicately thought-out security system that your inventory solution is bound to provide. Protecting outgoing data with firewalls and similar protective measures is a must for modern-day inventory management solutions.
Automatic alerts: Advances inventory management systems such as Logiwafree you of the manual labour that comes with monitoring stock data to keep up with the diminishing inventory. Data such as low product levels, anomalies, incoming shipments, delayed deliveries and can now receive supplier notes throughout the alerts sent by the automated system.
Both fast-growing e-commerce companies and established businesses go for a perpetual inventory system to keep track of their inventory. With a centralized inventory management system, an optimized stock level, and substantial stock control, a perpetual inventory system allows businesses to take complete control of their inventory and benefit from additional services such as order management and forecasting.
Written by Erhan Musaoglu
Erhan Musaoglu is the CEO and Co-Founder of Logiwa.