Perpetual Inventory is a method for tracking and knowing the value of inventory and quantity of merchandise on hand at any time by tracking sales, returns and receipts with information systems.
A perpetual inventory system is a continuous record of unit quantity/valuation increases and decreases to a particular line item of merchandise in the inventory. A periodic inventory system only uses physical verification/valuation of inventory at predetermined intervals, but no less frequently than annually.
- Requires more record keeping than periodic inventory management system.
- Records are kept of the quantity and, usually, the cost of individual items as they are bought or sold.
- This system provides useful information for management purposes.
- The cost of each item is recorded in the Merchandise Inventory account when purchased.
- As merchandise is sold, its cost is transferred from Merchandise Inventory account to the Cost of Goods Sold account.
- The balance of the Merchandise Inventory account equals the cost of goods on hand.
- The balance of the Cost of Goods Sold account equals the cost of the merchandise sold to customers.
- The Purchases account is not used.
- Due to the widespread use of computers, the distinction between which inventory system is most appropriate is blurred.