Understanding Inventory Systems: Perpetual vs Periodic

May 12, 2025

Perpetual and Periodic Inventory Systems

Introduction

  • Presenter: James from Accounting Stuff
  • Context: Continuation of inventory mini-series
  • Goal: Explain perpetual and periodic inventory systems, their differences, and how they work

Definitions

  • Inventory in Merchandising: Goods held by a business to sell and earn revenue
  • Perpetual Inventory System:
    • Continuously updates inventory accounts as goods are bought and sold
    • Tracks inventory on a unit-by-unit basis
  • Periodic Inventory System:
    • Updates inventory at regular intervals (e.g., end of month/quarter/year)
    • Triggered by physical inventory count

Pros and Cons

Perpetual Inventory System

  • Pros:
    • Real-time tracking of inventory levels
    • Identifies stock shortages quickly
  • Cons:
    • Can be expensive to set up
    • Potential discrepancies between system and physical inventory (due to theft, loss, or errors)

Periodic Inventory System

  • Pros:
    • Simpler and cheaper to set up
  • Cons:
    • Results are delayed
    • Less control and visibility over inventory between counts

Example Scenario

  • Business: Bookshop
  • Starting Inventory: 300 books at $8 each
  • October Purchase: 500 books at $8 each
  • Sales: 450 books at $15 each
  • Cost Valuation Methods: FIFO, LIFO, Average Cost (to be covered in future videos)

Accounting for Transactions

Calculation Overview

  • Opening Inventory = 300 books x $8 = $2,400
  • Additions in October = 500 books x $8 = $4,000
  • Cost of Goods Available for Sale = $2,400 + $4,000
  • Cost of Goods Sold = 450 books x $8 = $3,600
  • Closing Inventory Calculation =
    • Cost of Goods Available - Cost of Goods Sold

Perpetual System

  • Records Additions and Sales in Real-Time:
    • Journal Entries:
      • Additions: Debit Inventory, Credit Cash/Accounts Payable
      • Sales:
        • Credit Revenue (450 x $15 = $6,750)
        • Debit Cash/Accounts Receivable (450 x $15 = $6,750)
        • Credit Inventory (450 x $8 = $3,600)
        • Debit Cost of Goods Sold (450 x $8 = $3,600)
  • Inventory Continuously Updated: Closing balance can be calculated at any time

Periodic System

  • Records Additions in Purchases Account:
    • Journal Entry:
      • Debit Purchases, Credit Cash/Accounts Payable
  • Sales Only Recognize Revenue:
    • Credit Revenue, Debit Cash/Accounts Receivable
  • Closing Inventory Count Needed for Cost of Goods Sold:
    • Conduct physical count
    • Adjust purchases to inventory account at end of period
    • Calculate final Cost of Goods Sold after inventory count

Key Differences in Timing

  • Perpetual: Real-time results
  • Periodic: Results obtained post-inventory count

Conclusion

  • Cheat Sheet Available: Summarizes key points and can be purchased online
  • Future Content: More inventory methods and details to be covered in upcoming videos
  • Engagement: Encouragement to subscribe for more content

This summary provides a comprehensive overview of the perpetual and periodic inventory systems as presented by James in his video on Accounting Stuff.