Perpetual Inventory System

Perpetual inventory as a system of records maintained by the controlling department which reflects the physical movement of stocks and their current balance. In contrast to the periodic system, the perpetual inventory item system requires continuous updating with each purchase or sale transactions. A separate account for each type of inventory is maintained in a card or sheet to record the purchase and sale of each inventory item throughout the year. The system is integrated in accounting records by maintaining usual ledger accounts for each inventory item. The detailed inventory records for each different item must show: (a) Receipts (Purchases); (b) Issues (Sales), and (c) Balance on hand, usually in both quantities and rupee amount. When goods are purchased or sold, the inventories must be adjusted immediately. In accounting terminology, the increases items are recorded as debits (or receipts) to terminology, the increases in inventory items are recorded as credits; the balances of the inventory items accounts are called the book inventories of the items on hand. The quantities of goods on hand as shown by the records must be in agreement with the actual quantity on hand. It is relevant to state that the use of perpetual inventory method does not eliminate the need for a physical count and valuation. In fact it is necessary to test the accuracy of the records maintained under perpetual method by taking a physical inventory of each type of commodity at least once a year. The records are then compared with actual quantities on hand and any difference must be corrected ad investigated, if necessary.

Advantages:

The benefits of a perpetual inventory system may be noted as:

(i)    The normal business operations are not interrupted and there is no need to put closed for inventory taking’ signs either in departments or in entire business.

(ii)    It obviates inventory the need for stock taking by actual count at the end of financial period.

(iii)    In some cases the volume of inventory items may be such as to make a complete count in one day impossible.

(iv)    In a large business, special staff may be employed for stock taking so that a grater degree of skill in performing the job is built up.

(v)    Controlling losses is easier under a perpetual system because inventory records continuously indicate the goods that must be on hand.

(vi)    There is no sudden ‘out of stock’ situation leading to customer dissatisfaction or need to shut down production lines.

(vii)    In case there are irregularities or changes in procedures by storekeepers, it may lead to thorough enquiry and investigation into the same.

Perpetual inventory system is costly to maintain especially for those business firms which deal with numerous items of small value but the benefits as noted above are no less significant. The periodic inventory system….is ordinarily used by retail enterprises that sell a great variety of low unit cost merchandise, such as groceries, hardware and drugs. The expenses of maintaining perpetual inventory records are likely to be prohibitive in such cases. Firms, selling a relatively small number of high unit cost items, such as office equipment, automobiles… are likely to employ the perpetual system.

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