WHAT IS PERPETUAL INVENTORY BOOKKEEPING OR ACCOUNTING?
The major difference between the two methods of recording for inventory is the extent to which stock movements are monitored.
The physical system of recording for inventory does not keep records of the movements of stock. The only information in the ledger concerning merchandise is the recording in the stock account of the total inventory determined by a physical stock-take at the end of each accounting period.
Under the perpetual (continuous) method, individual items of merchandise are recorded on stock cards and a stock control account is kept continuously up to date by recording movements of all inventories into and out of the business.
Perpetual inventory involves keeping records of all stock movements throughout the accounting period. It is also known as the continuous inventory method. This method updates the balance of stock on hand on a continuous basis throughout the period. Every time stock moves in or out of the business, the inventory balance is updated. When stock is purchased, the balance is increased. When sales are made, the balance will be decreased.
Sales returns have the effect of increasing stock on hand and purchase returns decrease the stock on hand. Withdrawals of inventory by the proprietor must also be accounted for, as this will decrease the balance of stock. As inventory is always recorded at cost price, there is a need to have access to information regarding the cost price of stock throughout the accounting period.
The disadvantages and advantages of this system are as follows:
DISADVANTAGES OF PERPETUAL INVENTORY
1. Additional record keeping is involved because balances must be updated on a continuous basis. This may increase the workload of the owner/manager or lead to an increase in staff levels.
2. Additional costs may be incurred because of the additional record-keeping. These costs may involve extra staff and/or equipment
3. There is still the need for a physical stock take at the end of the accounting period. Although records are continuously updated, events such as breakages, theft and bookkeeping errors may not be taken into account. The only way to determine the actual stock on hand is by a physical stock take.
ADVANTAGES OF PERPETUAL INVENTORY
1. There is greater control over stock because up-to-date information is available throughout the accounting period. This means management is able to make better decisions relating to inventory.
2. Slow moving and fast moving lines of inventory can be identified. An electronic stock card is used to record all movements of a particular item of inventory.
3. Reordering of inventory is more efficient. Part of perpetual inventory involves keeping a record of how many units of each type of stock are on hand at any time. When the number of units reaches a certain level (known as the reorder point) an order can be despatched to the relevant supplier. This helps to avoid the problem of running out of stock.
4. Interim profit reports can be prepared without doing a stock take. Gross profit figures can be calculated on a monthly/weekly or even daily basis, and estimated net profit figures can be calculated for each week or month.
5. The level of stock losses or gains can be measured. The perpetual method can identify the stock actually sold and the goods which have been lost (due to theft and breakages).
