Perpetual Inventory
What is Perpetual Inventory?
Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately using modernized point-of-sale systems and enterprise asset management software. Perpetual inventory gives an exceptionally nitty gritty perspective on changes in inventory with immediate reporting of the amount of inventory in stock, and precisely mirrors the level of goods close by. Inside this system, a company puts forth no attempt at keeping definite inventory records of products close by; rather, purchases of goods are recorded as a debit to the inventory database. Actually, the cost of goods sold incorporates such components as direct labor and materials costs and direct factory overhead costs.
A perpetual inventory system is recognized from a periodic inventory system, a method where a company keeps up with records of its inventory by routinely scheduled physical counts.
Figuring out Perpetual Inventory
A perpetual inventory system is better than the more seasoned periodic inventory system since it considers immediate tracking of sales and inventory levels for individual things, which assists with forestalling stockouts. A perpetual inventory needn't bother with to be adjusted physically by the company's accountants, but to the degree it contradicts the physical inventory count due to loss, breakage or theft.
How Perpetual and Periodic Inventory Systems Work
A point-of-sale system drives changes in inventory levels when inventory is diminished, and cost of sales, an expense account, is increased at whatever point a sale is made. Inventory reports are gotten to online whenever, which makes it simpler to oversee inventory levels and the cash expected to purchase extra inventory. A periodic system expects management to stop carrying on with work and physically count the inventory before posting any accounting passages. Businesses that sell large dollar things, for example, vehicle sales centers and jewelry stores, must regularly count inventory, however these organizations likewise keep a point-of-sale system. The inventory counts are performed regularly to forestall theft of assets, not to keep up with inventory levels in the accounting system.
Calculating in Economic Order Quantity
Utilizing a perpetual inventory system makes it a lot simpler for a company to utilize the economic order quantity (EOQ) to purchase inventory. EOQ is a formula managers use to choose when to purchase inventory, and EOQ considers the cost to hold inventory, as well as the company's cost to order inventory.
Instances of Inventory Costing Systems
Organizations can browse several methods to account for the cost of inventory held available to be purchased, yet the total inventory cost expensed is a similar utilizing some method. The difference between the methods is the timing of when the inventory cost is recognized, and the cost of inventory sold is posted to the cost of sales expense account. The first in, first out (FIFO) method accepts the most established units are sold first, while the last in, first out (LIFO) method records the freshest units as those sold first. Businesses can improve on the inventory costing process by utilizing a weighted average cost, or the total inventory cost separated by the number of units in inventory.
Features
- Perpetual inventory systems are as opposed to periodic inventory systems, in which repeating counts of products are used in record-keeping.
- The perpetual inventory method doesn't endeavor to keep up with counts of physical products.
- Perpetual inventory systems track the sale of products immediately using point-of-sale systems.
