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perpetual inventory system

A perpetual (or continuous) inventory system is a mechanism that companies use to provide a real-time measure of inventory on hand throughout the year. This system aids with inventory management and enables companies to keep a running tally of their inventory balances so that they can meet demand but avoid a serious oversupply. Updates are made automatically to perpetual inventory systems when a product is received, sold or returned.

The use of perpetual inventory systems has become more widespread in recent years as point-of-sale and other computerized systems, including barcode technology, have become commonplace. Generally accepted accounting principles permit companies to use either periodic or perpetual systems to monitor inventory.

Unlike periodic inventory systems, which measure inventory at the beginning and end of a set period, perpetual inventory systems record balances of inventory after every transaction and do not rely solely on quarterly or annual data to calculate the cost of goods sold (COGS). With perpetual systems, when a sale is recorded, an entry is made to decrease inventory and increase the COGS; thus, the ending inventory and COGS accounts both reflect current balances at any point in time.

Although perpetual inventory systems require more record-keeping than periodic inventory systems, they typically offer finer detail and greater control for company management. With perpetual inventory systems, every inventory item is recorded in a separate ledger, which contains information on COGS, purchases and inventory on hand.

Small-business managers may have to weigh the costs of using perpetual versus periodic inventory systems. As they grow and become more computerized, they may shift to perpetual inventory systems. Businesses with more than one location often use a centralized perpetual inventory system, including a record of what was sold and from where, when and at what price. Companies that sell services but not products, may not need an inventory management system; the exception might be those in the restaurant or hospitality businesses.

Even if a perpetual inventory system is operating well, it is usual practice to measure accuracy and validate balances by using a physical count at regular intervals to help validate accuracy and identify potential flaws in the transaction system. The benefit of doing a periodic physical inventory count is to determine how much inventory may have been accidentally misstated, lost, stolen or damaged.

This was last updated in July 2017

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