Perpetual vs Periodic Inventory System for E-commerce Businesses

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Raw materials and finished goods that corporations keep on hand for manufacturing or that are sold to customers via markets is referred to as inventory. The material is an essential component of the cost of production, accounting for 80% of the overall product cost. As a result, using the inventory record system, every manufacturing company maintains track of its inventory acquired, returned, and issued throughout the year.

There are two types of inventory systems: perpetual inventory systems, in which stock movement is tracked continually, and periodic inventory systems, in which inventory records are updated only after a physical count of the stock. Both are accounting systems used by organizations to keep track of how many things they have on hand. They are, nevertheless, fundamentally different. 

Features of Perpetual and Periodic Inventory Systems

Since both perpetual and periodic inventory systems come under the umbrella of types of inventory systems, we will use similar parameters to list the different features of the perpetual and periodic inventory systems. Let us take a look at them: 

Methods of recording

Perpetual systems use computers and software to update a firm’s general ledger with information about sold items and leftover inventory. Periodic systems, on the other hand, necessitate manual recordkeeping.

The margin of error

Since the counting is done manually, periodic systems have a larger potential for inaccuracy. Perpetual systems are commonly used when there is no risk of loss or theft of a company’s goods.

Effort and time

Once the software and supporting infrastructure are implemented, companies are not obliged to put in a lot of work with perpetual systems. Since everything is done electronically, this is the case. Physical counts are required by periodic systems, which can be time-consuming, especially if recounts are required.

COGS Accounting

Unlike perpetual inventory systems, periodic inventory systems do not have continuous transactions under the COGS (cost of goods sold) account.
Rather, when the number is conducted at the end of the interval, it is determined by calculating using a lump sum.

Perpetual vs Periodic Inventory

Adjusting and Closing Inventory Calculations

Adjusting entries represent unrecorded economic activity that has occurred but has yet to be recorded, either because it is more simple to wait till the end of the term to record the activity or because no reference document pertaining to that transaction has thus far come to the accountant’s knowledge.

Each adjusting item has two purposes: (1) it corrects the revenue or cost shown on the income statement, and (2) it corrects the asset or liability reported on the balance sheet. As a result, each adjusting entry impacts at minimum one income statement and balance sheet account.

Since the perpetual and periodic inventory systems are fundamentally different, they follow different adjusting and closing inventory entries and calculations. Let us understand these entries briefly:

Perpetual Inventory Method

We evaluate the physical stock value obtained from the unadjusted sample remaining balance for inventory using the perpetual inventory technique. If there is a discrepancy (which nearly always occurs due to burglary, damage, waste, or human mistake), an adjusting entry should be made. An inventory deficit occurs when physical inventory is less than the unadjusted balance sheet value of the output.

The closing inventory calculation is as follows:

Inventory at the Beginning + Receipts – Issues = Inventory at the end

Periodic Inventory Method

We do not enter any purchase or sales payments straight into the inventory system while using the periodic inventory technique. The inventory unadjusted trial balance shows the ending balance from the previous period and excludes the current period. We also do not keep track of the cost of things sold throughout that time. The ending inventory will be determined using the physical inventory count to figure out how much modification is required.

The calculation below is used to maintain records of the cost of inventory sold in a year:

Inventory at the Beginning + Purchases – Inventory at the end = Cost of Goods Sold

Perpetual vs Periodic Inventory

Advantages and disadvantages of the Perpetual Inventory System

The perpetual inventory system automatically changes inventory levels regularly. This system heavily relies on automation to record sales and purchases in real-time and update inventory data. As a result, this method enables firms to retain a precise and real-time inventory count. However, the perpetual inventory system also comes with some disadvantages that business owners should consider:

Learn more about them here:

Advantages of the perpetual inventory system​

  1. Keeps you updated in real-time: As soon as the business acquires goods or a portion of the goods is sold in the market, a perpetual inventory system tracks real-time adjustments in stock levels. As a result, a company may identify inventory goods that are running short at the correct moment via continuous stock tracking.
  2. Effective management of multiple locations: A perpetual inventory system enables a large firm with several sites to run efficiently. It becomes impossible to manage the level of inventory of all the shops at different locations without a permanent inventory system. However, with a real-time stock count of all sites on your screen, the central facility may quickly determine the chain’s overall demand and make an order.

  3. Detailed forecasting of buying and selling: A perpetual inventory system helps you to learn about your consumers’ purchase habits. Because the inventory system is continually updated, the firm may discover, for example, that demand rises at certain times of the day, or that weather conditions are linked to increased demand of a certain product. As a result of this insight, the company may organize its chain of supply around its consumers’ purchasing patterns.

  4. Supports financial statement preparations: The inventory value is included in the financial accounts. Because the stock count is readily available, a perpetual inventory system reduces delays in the creation of financial statements. In this regard, the technology eliminates the time-consuming and expensive procedure of manually counting inventory levels.

Disadvantages of the perpetual inventory system​

  1. Costly accounting system: Perpetual inventory systems are costly. The technology required to make the system operate (barcodes, scanners, computer software, and so on) may be costly. Updating the old system to make room for the new one might add to the costs. Another cost is training or hiring new personnel to work on the system. As a result, this approach is not suited for a small business with poor margins.
  2. No accountability for breakage or spoilage of the products: Purchases and sales are used to update inventory levels in the perpetual inventory system. If certain things break down or deteriorate after being purchased and stored, management will not be notified unless a physical inventory count is performed.

    On the other hand, the perpetual inventory system does not involve a physical count. So, until the ‘voluntary’ physical count takes place, the broken pieces will be counted as inventory. The same may be said about thefts. As a result, this system has the potential for inaccuracy.

Advantages and disadvantages of the Periodic Inventory System

The periodic inventory approach was well valued until technology brought some important modifications to accounting possibilities, notably in terms of software. It wasn’t a flawless system, but many people believed it didn’t have to be. They would argue that the advantages of employing the periodic inventory approach outweigh the disadvantages. The fact that many adherents of the periodic inventory system still exist today is arguably the most intriguing aspect of this. But just like the perpetual inventory system, the periodic inventory system also comes with some major disadvantages.

Let us have a look at them:

Advantages of the periodic inventory system​

  1. Implementation is simple: One of the most significant advantages of having a periodic inventory system is how simple it is to install. In a matter of minutes, you can integrate this technology into your company. It is unquestionably less burdensome than any other method of keeping track of your inventory.

    Counting inventory physically is a task you can do anytime you feel like it. Most companies that use this technique will implement it once a year. You are allowed to define “periodic” however you like. Remember that orders placed during the year will be included in the previous year’s closing inventory.

  2. Less costly to put to function: The periodic inventory system will be ideal if you want the most straightforward approach available. This technique eliminates the need for pricey software solutions. Except for the time spent doing a physical inventory, you don’t need to invest much in terms of money. Additionally, provided that you are prepared to put in the effort, your costs will never go higher.
  3. Beneficial for smaller businesses: As you might expect, extremely tiny enterprises are the ideal candidates for such a system. We’re talking about a small team of 1-2 employees, minimal inventory, and a few handfuls of orders each year. Larger companies may also utilize this approach, although it becomes more difficult when dealing with several employees and thousands of sales every year.

Disadvantages of the periodic inventory system

  1. More errors: The fact that you’re working with something that can be very incorrect is one of the major disadvantages of a periodic inventory system. Keep in mind that at the end of the year, an accounting record is updated to match your physical count of inventory. As a result, the system is fundamentally defective. You can’t guarantee correctness all the time. Only to a fair degree can you be certain of its correctness. It might not be an issue for certain firms, especially if you are working with a small business. Larger organizations, on the other hand, should be aware that mistakes aren’t the norm, but neither are they uncommon when using this approach.
  2. Requires more energy and labor: Using the periodic inventory method isn’t difficult if you have a small inventory and only a few dozen orders for the year. You can even enter data into an Excel spreadsheet. A periodic inventory system, on the other hand, might become quite difficult as your company expands. Doing a physical inventory might become a time commitment that you shouldn’t attempt to accomplish. It can be difficult to find the time and energy, especially for small organizations, to ensure that a periodic inventory system is properly managed. That is where your errors may begin to show up.
  3. Difficulty in preventing inaccuracies: Another factor to take into account is that maintaining inventory management will become increasingly challenging. It might also be difficult to determine the extent of stealing.

How to pick the best inventory system for your company?

Finding the finest inventory system for your company might be difficult, but if you know what features you are looking for, you’ll be ahead of the game. Take the time to do your research, know your company better, and make an informed selection. Some factors to consider when picking a suitable inventory system for your company are:

Tracking of inventory

You must be able to trace the location of raw materials and completed goods across the supply chain to deploy an inventory control system. You may automate inventory tracking with the aid of an inventory system for e-commerce, eliminating the need to conduct tiresome and time-consuming chores manually. Many systems, for example, generate tracking numbers automatically when they issue a statement or invoice, saving crucial minutes and mental energy.

Barcoding of stocks

Not only does barcode scanning eliminate data input mistakes, but it also automates operations that need connectivity with other sections of the inventory system. Inventory processes become considerably more coherent when data is collected, stored, and organized digitally. You may increase the stock level, speed up stock restocking, and provide electronic reporting of your work with barcode scanners.

Analytics

Analytics are crucial for comprehending corporate performance and client behavior. However, inventory management software must do more than just gather data; it must also show information in a tangible and useful manner. Many inventory systems give predefined summaries to provide the key indicators you want, while others may go even further and allow you to design reports to dive deeper into the information that is specific to your company.

Continuous updates

Continuous updates in an inventory management system indicate that the software is constantly updated with the most recent information. In other terms, the inventory count is in real-time and shows what is now in stock. Periodic updates, which occur at regular intervals (daily, weekly, monthly), are an alternative to this strategy. Perpetual updates are generally favored since these data only indicate what was in storage when the counting was conducted. Real-time inventory counts prevent out-of-stock products from being ordered, and allow you to monitor raw material levels so you may replenish just in time to fulfill client demand.

Effective operations integration

You’re probably utilizing a range of management solutions to operate your company. If your inventory isn’t linked to each of your back-end apps, you’ll have to manually enter data, causing serious delays. Logistics administration, accounting software, and buying systems are all routinely connected with inventory management systems. The more these apps can communicate with each other through integration, the more efficient your supply chain will become, saving you time and money.

Quality customer support

Once you’ve decided on an inventory management system, having access to excellent customer service is critical to your software’s success. Having someone ready to assist you when you can’t identify your buy transactions, or your staff doesn’t understand how to establish stock alerts, is critical. Your concerns may be unsolved if you don’t have access to customer service, resulting in a supply chain bottleneck. As a result, ensure that your software provider provides comprehensive support, involving training, warranty, and 24-hour support.

Conclusion

The type of inventory system you employ is determined by the characteristics and size of the company you have. The periodic approach may make sense if you run a small firm with an easy-to-manage inventory. This mechanism allows you to manually update your accounts. A permanent system would be worth considering if you have a firm with more complicated inventory levels.

Human mistakes are considerably decreased, and often completely eliminated, because of automation. The implications are numerous, ranging from improved business margins to enhanced customer retention to fewer stockouts, and other factors. Inventory management solutions are the most effective approach to saving considerable time and minimizing overspending, concentrating mostly on your customers and setting even higher goals.

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FAQs

There are several inventory systems from which to pick.

The frequency with which inventory data is updated differs between perpetual and periodic systems. Although manual methods are easier to run, automated ones are significantly more accurate. Finally, a server-based system retains your application and server on-site, but cloud-based solutions save data in an electronic database that can be accessed from anywhere.

Periodic inventory is counted physically throughout time, whereas perpetual inventory is automated and managed through point-of-sale and business asset management systems. The former is less expensive, whilst the latter requires more time and expense to complete.

The ideal inventory system is one that matches your company’s demands across the supply chain. LOCAD, on the other hand, continues to be an efficient logistics service provider, enabling businesses of all kinds to integrate their goods, fulfillment facilities, and distribution channels into a single platform. Companies can easily obtain clarity across different channels, control stock count in real-time, and help accelerate the fulfillment process using Locad’s inventory management solutions.

Inventory management system prices vary widely based on the characteristics you want, how customized you want the program to be, and other factors.

Yes, the perpetual inventory system generally outperforms the periodic inventory method. That’s because the software program that corporations use makes it a hands-off, low-effort procedure. Goods are barcoded and tracked from shelf to sale using point-of-sale technology. These barcodes provide businesses with all the data they want on individual items and how long they lay on shelves before being purchased. Permanent systems also preserve detailed records of the costs of commodities sold and purchased.

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