Loading the player...

What is 'Perpetual Inventory'

Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software. Perpetual inventory provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, and accurately reflects the level of goods on hand.

BREAKING DOWN 'Perpetual Inventory'

A perpetual inventory system is superior to the older periodic inventory systems because it allows for immediate tracking of sales and inventory levels for individual items, which helps to prevent stockouts. A perpetual inventory does not need to be adjusted manually by the company's accountants, except to the extent it disagrees with the physical inventory count due to loss, breakage or theft.

How Perpetual and Periodic Inventory Systems Work

A point-of-sale system drives changes in inventory levels because inventory is decreased, and cost of sales, an expense account, is increased whenever a sale is made. Inventory reports are accessed online at any time, which makes it easier to manage inventory levels and the cash needed to purchase additional inventory. A periodic system requires management to stop doing business and physically count the inventory before posting any accounting entries. Businesses that sell large dollar items, such as car dealerships and jewelry stores, must frequently count inventory, but these firms also maintain a point-of-sale system. The inventory counts are performed frequently to prevent theft of assets, not to maintain inventory levels in the accounting system.

Factoring in Economic Order Quantity

Using a perpetual inventory system makes it much easier for a company to use the economic order quantity (EOQ) to purchase inventory. EOQ is a formula managers use to decide when to purchase inventory, and EOQ considers the cost to hold inventory, as well as the firm’s cost to order inventory.

Examples of Inventory Costing Systems

Companies can choose from several methods to account for the cost of inventory held for sale, but the total inventory cost expensed is the same using any method. The difference between the methods is the timing of when the inventory cost is recognized and the cost of inventory sold is posted to the cost of sales expense account. The first in, first out (FIFO) method assumes the oldest units are sold first, while the last in, first out (FIFO) method records the newest units as those sold first. Businesses can simplify the inventory costing process by using a weighted average cost, or the total inventory cost divided by the number of units in inventory.

  1. Periodic Inventory

    The periodic inventory system is a method of inventory valuation ...
  2. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  3. Inventory Reserve

    An inventory reserve is a contra asset account on a company's ...
  4. Inventory Accounting

    Inventory account is the body of accounting that deals with valuing ...
  5. Inventory Management

    Inventory management is the process of ordering, storing and ...
  6. Retail Inventory Method

    The retail inventory method is a fast and easy valuation alternative ...
Related Articles
  1. Investing

    Understanding Periodic vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  2. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  3. Investing

    EIA vs. API: Comparing Crude Inventories Announcements

    Between the two major oil inventory reports: the API and the U.S. EIA, which is more highly regarded and why?
  4. Investing

    Can Oil’s Strong Recovery Last? (XLE, USO)

    New data shows weaker oil inventories, boosting energy companies and oil futures.
  5. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  6. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  7. Investing

    Inventory: FIFO, LIFO

    Whether a company chooses FIFO or LIFO has important implications for the bottom line and for tax liability.
  8. Small Business

    4 Lessons Small Businesses Can Learn From "The Profit"

    Learn some of the most valuable lessons that small business owners can glean from watching episodes of Marcus Lemonis' show, "The Profit."
  9. Insights

    How Healthy Are Costco's Financials Versus Its Peers? (COST)

    Find out why Costco's financials may be healthier than those of its peers, especially regarding inventory turnover, debt coverage and stock valuation.
  10. Investing

    U.S. Oil Inventory Piles Up, Prices Decline

    As U.S. oil inventories continue to increase and no supply cut coming from other oil producing nations, the oil prices will remain pressurized.
  1. What is the formula for calculating inventory turnover?

    Learn about the inventory turnover ratio, how it is calculated and what this efficiency metric tells businesses about their ... Read Answer >>
  2. How is the economic order quantity model used in inventory management?

    Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
  3. What does days sales of inventory (DSI) represent as a ratio?

    Discover what the days sales of inventory (DSI) ratio represents for traders or market analysts and how this ratio is used ... Read Answer >>
  4. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Understand the principles behind just-in-time inventory management and customer-managed inventory. Learn the difference between ... Read Answer >>
  5. What does a high inventory turnover tell investors about a company?

    Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Read Answer >>
  6. How does an investor evaluate an inventory turnover ratio for a retail company?

    Understand more about inventory turnover and what it measures. Learn how an investor should evaluate an inventory turnover ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center