Perpetual inventory system
The perpetual inventory system is one of the methods to record inventory transactions. In this system, inventory is updated every time in the event of sales, purchase or returns of the goods. It is more recommended to use that system rather than the periodic inventory system in these days.
Advantages of the Perpetual inventory system
Following is the list of some of the advantages of accounting for inventory under the perpetual inventory system.
- It allows efficient and accurate restocking because inventory is being updated after every entry relating to the stock
- As because of the nature of this system, one can easily reconcile the recorded inventory with the physical stocks and that feature allows the businessman to track theft and shrinkage (if any)
- Under this system, interim financial statements are being prepared more accurately
- This system allows the owner to check the inventory turnover ratio at any time because of the reason that inventory levels are always accurate under this system
Disadvantages of the Perpetual inventory system
Below is the list of the disadvantages of accounting for inventory under the perpetual inventory system.
- This system requires more monitoring
- In order to run that system, more set up cost have to be borne by the businessman
- More skilled staff is required to run the perpetual inventory system efficiently and effectively
- This system is more complex than the periodic inventory system so there are more chances of occurring the error by the employee relating to inventory recordings and as a result, that system would be misleading for the businessman
Effects of the inventory errors
Inventory errors are considered to be the more dangerous as per accounting point of view. That is because of the reason that inventory errors directly affect the cost of goods sold and cost of goods sold affect the net profit of the company. Moreover if there is an error in valuation of the closing or opening inventory then that error not only affect the current year financial statements but also affect the coming year financial statements.
CLIFFSNOTES. (2012, 07). Inventory Errors and Financial Statements . Retrieved from cliffsnotes.com/more-subjects/accounting/accounting-principles-i/inventory/inventory-errors-and-financial-statements: http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-i/inventory/inventory-errors-and-financial-statements
McIntosh, K. A. (2013, 02). Disadvantages to a Perpetual Inventory System. Retrieved from ehow.com/info_8053365_disadvantages-perpetual-inventory-system.html: http://www.ehow.com/info_8053365_disadvantages-perpetual-inventory-system.html
Mohr, A. (2012, 07). The Advantages of the Perpetual Inventory System. Retrieved from smallbusiness.chron.com/advantages-perpetual-inventory-system-3223.html: http://smallbusiness.chron.com/advantages-perpetual-inventory-system-3223.html