

Perpetual Inventory System Accounting
The meaning of perpetual inventory is that it deals with the record of the physical quantities of the stocks and its valuation. There are two principles to determine the inventory of a firm, which are the periodic inventory system and the perpetual inventory record system.
Perpetual Inventory System Meaning
The perpetual inventory system records the stocks continuously. Under the perpetual inventory system, the inventory gets recorded after each issue or receipt or purchase of the raw materials, work in progress, final goods, etc. The perpetual inventory system cost of goods sold are updated on a day to day basis.
For ensuring the accuracy of the perpetual inventory transactions, the physical counts of the inventory are carried out many times in a year. This ensures that the inventory is cross-checked and the validity and the accuracy of the perpetual inventory accounting is checked as well. According to the perpetual inventory system, the value of the closing stock is determined by the cost of goods that are issued and the cost of goods that are sold. The equation given below refers to the closing inventory valuation.
Opening Stock (known value) + Purchases during the year (known) – COGS (known) = Closing Stock (balancing figure)
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Advantages of a Perpetual Inventory System
The advantages of the perpetual inventory record system are given as follows:
It helps in avoiding the time-consuming practices of the regular stock taking. According to the perpetual inventory management system, the stocks are counted only a few times in the year.
The management keeps a daily record of the valuation and quantity of the closing stock which helps in the distribution and the production management.
There is also a system of internal check which dissuades misappropriation or thefts. The records of different departments like stores, purchases, and manufacturing are checked against each other.
There is no requirement to halt the process of production for taking physical stock count often.
Periodic Inventory System
According to the periodic inventory system, the verification of the inventory is carried out by the physical count of the inventory on a given date. Hence, for determining the closing stock the physical count of the inventory including the weight, numbers, etc. are taken. Firms usually tend to carry this out around the end of the accounting year.
The valuation of the inventory or the closing stock is done with the help of either of the inventory pricing methods like Average Cost, FIFO, LIFO, etc. In this method, the cost of the goods sold are calculated using the following equation:
Opening Stock (known value) + Purchases during the year (known) – Closing Stock (counted) = COGS (balancing figure)
Disadvantages of the Periodic Inventory System
The disadvantages of the periodic inventory system are mentioned below:
Firms tend to do a physical count more than one time in a year and generally make quarterly or monthly installments that need frequent inventory counting.
For carrying out a physical count, the normal manufacturing and several other activities are suspended which eventually leads to losses for the firm or business.
COGS is regarded as a balancing figure which means that it cannot be accounted for the losses due to any kind of damages or abnormal losses.
The periodic inventory system also does not provide any kind of inventory control systems or methods.
FAQs on Perpetual Inventory Recording System Overview
1. What is a perpetual inventory system in accounting?
A perpetual inventory system is an inventory accounting method where stock levels are continuously updated in real-time. Every time an item is purchased or sold, the inventory records are immediately adjusted, providing an up-to-date account of goods on hand.
2. How does the perpetual inventory system work?
This system typically works through computerized point-of-sale (POS) systems or enterprise resource planning (ERP) software. When goods are bought, they are debited to the inventory account. When goods are sold, the cost of goods sold is recorded immediately, and the inventory account is credited, reducing the stock balance in real-time.
3. What are the main benefits of using a perpetual inventory system for a business?
The main benefits of this system include:
- Real-time inventory data: Businesses always know exactly how much stock they have.
- Better inventory control: It helps in identifying discrepancies, theft, or damage quickly.
- Improved purchasing decisions: Accurate data leads to efficient reordering and reduced stockouts or overstocking.
- Accurate financial reporting: Provides up-to-date figures for cost of goods sold and inventory value, aiding in timely financial statements.
4. What are the key differences between perpetual and periodic inventory systems?
The key differences lie in their approach to tracking inventory:
- Perpetual System: Continuously updates inventory records with every purchase and sale. It directly calculates the cost of goods sold for each sale.
- Periodic System: Updates inventory records only at specific intervals (e.g., end of accounting period) after a physical count. Cost of goods sold is calculated indirectly at that time.
The perpetual system offers more control and real-time information, while the periodic system is simpler but provides less current data.
5. How are common transactions recorded under the perpetual inventory method?
Under the perpetual method, key transactions are recorded as follows:
- For Purchases: Debit Inventory Account, Credit Cash/Accounts Payable.
- For Sales (two entries):
- Debit Cash/Accounts Receivable, Credit Sales Revenue (for the selling price).
- Debit Cost of Goods Sold, Credit Inventory Account (for the cost of the goods sold).
- For Sales Returns: Debit Sales Returns and Allowances, Credit Cash/Accounts Receivable (for selling price); Debit Inventory Account, Credit Cost of Goods Sold (for the cost of returned goods).
6. What challenges can arise when maintaining a perpetual inventory system?
While beneficial, the perpetual system can face challenges such as:
- Accuracy Issues: Data entry errors, unrecorded transactions, or physical damage/theft can lead to discrepancies between recorded and actual stock.
- System Dependence: Relies heavily on accurate POS systems and software, and any system malfunction can impact data.
- Cost: Implementing and maintaining such a system can be more expensive than a periodic system, especially for smaller businesses.
Regular physical verification of stock is still recommended to ensure accuracy.
7. Which aspects of the perpetual inventory system are frequently asked in CBSE Commerce exams?
For CBSE Commerce exams, students should focus on:
- The definition and features of a perpetual inventory system.
- Its advantages and disadvantages.
- A clear comparison with the periodic inventory system, often requiring specific points of difference.
- Journal entries for common transactions like purchases, sales, and returns under this system.
- Conceptual questions that test understanding of its application and challenges in real-world scenarios.

















