Perpetual Inventory System
A perpetual inventory system operates on the principle of perpetual inventory and utilizes computerized point-of-sale technology to continuously update inventory records in real-time, thereby eliminating the need for manual inventory checks.
This system accurately reflects the quantity of available goods and provides a comprehensive view of any changes in inventory, with immediate reporting of the amount of inventory on hand.
In contrast, the perpetual inventory system method requires a business to constantly maintain detailed records of its products on hand. Purchases are recorded as debits in the inventory database. This approach differs from a periodic inventory system, where a business periodically takes physical counts to track its inventory.
With the rise in technology and automation, the use of perpetual inventory systems has become increasingly prevalent.
Increased Usage Of Perpetual Inventory Systems
In the past, perpetual inventory systems were not commonly employed since it was challenging to reliably and swiftly record and analyze the vast volumes of data.
However, recent technological advancements have greatly improved business and accounting practices. Computers and scanners can now be utilized for inventory monitoring systems, making perpetual inventory tracking more efficient and manageable.
Understanding Perpetual Inventory Systems
Because perpetual inventory systems provide real-time tracking of sales and inventory levels for specific items and help to prevent stockouts, they may be preferable than outdated periodic inventory systems. The company's accountants do not need to manually change a perpetual inventory, unless it differs from the actual inventory count due to loss, breakage, or theft.
Through the use of barcode scanners or other electronic records of product acquisition, sales, and returns as they happen, system software offers real-time changes to inventory. This data is added to a perpetual database that is always updated.
The system supports integration with teams in finance and accounting, among other areas. This promotes compliance with tax laws and other rules. Perpetual inventory data can be used by staff to better accurately inform customers about the availability of goods, spare parts, and other tangible components.
Advantages Of Perpetual Inventory Systems
- Real-time updates - As implied by its name, a perpetual system offers continuous updates on purchases and sales. Both managers and employees can keep an eye on these data and use them in real time as needed.
- More informed forecasting - One of the key benefits of a perpetual inventory system is the ability to monitor seasonal swings and consumer purchasing trends, as well as the opportunities such knowledge presents. A stocking strategy that reduces either excess or inadequate stock, which can lead to losses, is made possible by understanding and updating customer purchasing habits.
- Multiple-location management - The monitoring of inventory at several locations is one of the main difficulties in inventory management. Many fulfillment opportunities are made possible by a connected perpetual inventory system, including internal inventory management for all locations and product movement from one place to another.
- Preparation of financial statements - It is simpler to produce financial reports with this approach. Inventory value is one of the elements of financial statements; by immediately recording the quantity and value of the available stock, financial report preparation may be sped up and calculation errors can be avoided.
- Reduction of down time or store closures - Companies that only conduct recurring physical inventories must make difficult choices. Do they schedule employee time off, even shut down businesses frequently, to do inventories and improve accuracy, or do they choose less frequent stock counts and forgo the most recent information? These issues are solved by perpetual inventory systems.
Disadvantages Of Perpetual Inventory Systems
- Loss of stock - This can happen for a variety of reasons, including theft, damage, and spoiling. A loss results from a difference between the estimated perpetual inventory and a subsequent physical inventory.
- Improper inventory tracking - The effectiveness of a perpetual inventory system can be reduced by scanning errors, product misplacement, software malfunction, or operator (employee) faults. When this occurs, keeping track of the company's inventory and commodities at the warehouse or store will be difficult.
- Hacking - Despite their speed and efficiency, computers are prone to hacking and other forms of misbehavior. Hacking puts at risk the accuracy and security of all data and information and necessitates the adoption of cybersecurity measures, which can be costly.
- Cost - Because of the cost of the hardware, software, and training up front, perpetual inventory systems are expensive. The continuing expense of sustaining a perpetual system includes updates to all of the aforementioned items. A perpetual inventory system may not be necessary or even feasible for a small company with limited inventory and slim profit margins. However, larger businesses or those with multiple locations may see cost savings from using this system.