What is the Difference Between Perpetual and Periodic Inventory System?

The main difference between perpetual and periodic inventory systems lies in the timing and frequency of updates. Here are the key differences between the two systems:

1. Updating: Perpetual inventory systems continuously update inventory records and the cost of goods sold (COGS) as sales and purchases occur, while periodic inventory systems update records at specific intervals, such as at the end of an accounting period.
2. Recording Methods: Perpetual systems use computers and software to automatically update a company's ledgers, while periodic systems require manual recording.
3. Margin of Error: There is a greater chance of error with periodic systems because the counts are done manually, whereas perpetual systems provide more accurate tracking of inventory levels.
4. Inventory Level Monitoring: The perpetual system allows for better monitoring of inventory levels and problems, as it regularly updates inventory balances.
5. Cost of Goods Sold: In a perpetual inventory system, the cost of goods sold is calculated after every sale, while in a periodic inventory system, the total cost of goods sold is calculated at the end of a period.
6. Suitability: Smaller businesses and those with low sales volumes may prefer the periodic system, while businesses with larger, more complex levels of inventory and higher sales volumes may find the perpetual system more suitable.

In summary, the perpetual inventory system is generally more effective and accurate than the periodic inventory system, as it provides continuous updates and more precise tracking of inventory levels. However, the periodic inventory system may be more suitable for smaller businesses or those with simpler inventory management needs.

Comparative Table: Perpetual vs Periodic Inventory System

Here is a table comparing the differences between perpetual and periodic inventory systems:

The perpetual inventory system continuously updates inventory records as stock transactions occur, providing real-time information about inventory and cost of sales. It is suitable for businesses with larger, more complex levels of inventory and higher sales volumes.

The periodic inventory system, on the other hand, updates inventory records at periodic intervals, such as at the end of the accounting period. It is suitable for smaller businesses and those with low sales volumes, as it is less expensive and time-consuming. However, it has a higher margin of error due to manual counting and is less efficient for businesses with larger inventories.