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Perpetual Inventory System: How Does It Work?

The Perpetual Inventory System is a method of accounting for the number and value of goods on hand at any time. It helps with the vital task of keeping track of inventory levels so that we can timely replace goods when they run out and to ensure that we record the correct amount of revenue and the corresponding cost of sales (cost of goods sold).

The Perpetual Inventory System is crucial because it allows companies to keep track of their inventory levels and ensure they are always stocked with the necessary goods.

How Does the Perpetual Inventory System Work

Under the Perpetual Inventory system, businesses keep a running tally of the number of goods they have on hand at all times. This information is typically tracked using software designed specifically for this purpose. The software records sales and purchases as they happen via point-of-sale (POS) and enterprise asset management systems.

Perpetual Inventory System: Employee with Boxes

When we sell a good, the software automatically deducts it from the total number of goods on hand and generates the necessary accounting records. When a new shipment arrives, the software will add it to the balance and generate the required goods receipt notes (GRNs). There’s no need to keep a record of goods on hand as such reports are auto-generated. The system lets businesses know how many goods they have and easily track inventory levels in real-time.

The system also ensures that the company recognizes the correct revenue and corresponding cost of goods sold (COGS).

Who Uses a Perpetual Inventory System?

Businesses that deal in goods that are frequently bought and sold, such as retail stores, often use the Perpetual Inventory System. These businesses need to keep track of their inventory levels to ensure that they are always stocked with the necessary goods. The Perpetual Inventory system helps companies track the number and value of goods on hand in real-time.

Manufacturing companies also use the Perpetual Inventory System to track the level of raw materials they have on hand. This information is essential so companies can plan their production schedules and ensure they have enough raw materials to meet production demand.

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Implementing the Perpetual Inventory System in Your Business

If you are a business owner who deals in frequently bought and sold goods, you should consider implementing the Perpetual Inventory system.

You can implement it in various ways, depending on the needs of your business. You may track inventory semi-manually or use fully-automated software to help you keep track of your goods. No matter how you implement the system, it is crucial to ensure that all your employees receive adequate training on how to use it.

Remember a few things when implementing the Perpetual Inventory System in your business. You must ensure that you have enough space to store all your inventory. You also need to create a process for replacing goods when they run out. It is also vital that your employees know the importance of keeping accurate records of inventory levels. Most importantly, ensure you have the proper software to keep track of your good.

Additionally, although the Perpetual Inventory System effectively eliminates the regular physical stock counts typical for a Periodic Inventory System, most local legislations require at least one physical count per year. Make sure to have the necessary procedure to reconcile actual goods on hand and what the inventory module says.

Perpetual Inventory System: Boxes being Weighed

Benefits of Using the Perpetual Inventory System

There are several advantages of using the Perpetual Inventory System in your business.

  • The system allows businesses to keep track of their inventory levels and ensure they are always stocked with the necessary goods to avoid stockouts.
  • Perpetual Inventory systems can be customized to fit the specific needs of your business.
  • The system ensures highly detailed real-time inventory reporting to support the decision-making process and any management reporting needs.
  • The system auto-updates reorder points for each product regularly and generates the necessary purchase orders (POs).

Disadvantages of Using the Perpetual Inventory System

There are a few disadvantages of using the Perpetual Inventory System in your business.

  • If you do not have enough space to store all of your inventory, this system may not be suitable for you as it may result in overstocking if not correctly set.
  • You must have a process for replacing goods when they run out, or you may be unable to meet demand.
  • The system can be costly to implement appropriately. Apart from the software implementation, fully deploying a Perpetual Inventory System usually requires expensive automation hardware and employee training.
  • If your employees are not trained on how to use the system properly, it won’t be easy to keep accurate records of inventory levels.

Despite its disadvantages, a Perpetual Inventory System can still be essential for businesses dealing with frequently bought and sold goods. This system helps companies keep track of their inventory levels and make sure that they avoid stockouts.

Conclusion

Perpetual Inventory systems were not popular in the past. Recording and processing all transactions timely and accurately was challenging due to technology limitations and the large amounts of data involved. However, technological advancements In the last decade have made the Perpetual Inventory System a viable option for inventory management, significantly increasing its popularity among enterprises.

As mentioned above, the Perpetual Inventory System is usually used in businesses that deal in goods that are frequently bought and sold, such as retail stores. It is vital to keep track of inventory levels so that goods can be replaced when they run out and to ensure that the company records revenue and cost of goods sold correctly.

Dobromir Dikov

FCCA, FMVA

Hi! I am a finance professional with 10+ years of experience in audit, controlling, reporting, financial analysis and modeling. I am excited to delve deep into specifics of various industries, where I can identify the best solutions for clients I work with.

In my spare time, I am into skiing, hiking and running. I am also active on Instagram and YouTube, where I try different ways to express my creative side.

The information and views set out in this publication are those of the author(s) and do not necessarily reflect the official opinion of Magnimetrics. Neither Magnimetrics nor any person acting on their behalf may be held responsible for the use which may be made of the information contained herein. The information in this article is for educational purposes only and should not be treated as professional advice. Magnimetrics and the author of this publication accept no responsibility for any damages or losses sustained in the result of using the information presented in the publication.

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