Kirk Tanner explains the differences between a perpetual inventory system and a periodic inventory system.
Welcome to Whiteboard Wednesday. I’m Kirk Tanner, Chief Marketing Officer at Fishbowl. Whiteboard Wednesday is a video series where we’re going to talk about inventory topics and keep them simple enough that the discussion can fit on a whiteboard.
Today we’re going to talk about inventory systems. And there are two kinds of systems: There’s a perpetual system and there’s a periodic system. And it all has to do with those goods that you’re purchasing and selling.
So let’s do a little comparison here so you understand the two. Under the perpetual system, all the transactions are being updated real time, which means that you’ve got cost of goods right up here at the front when you’re purchasing or selling goods.
Over under the periodic system, all of the updating is happening at the end of the accounting period, and you’re gonna have purchases and sales that are reported separately, which means that cost of goods are all added up at the end of the accounting period, as I said previously, and we’ll talk about that a little bit later on.
For sales transactions, under a perpetual system, there are two journal entries when an item is sold. The first one is the value of the inventory, the second one is the cost of goods sold.
Under your periodic system, we only have one journal entry, and that’s the sale value of that item that you’re selling. So what has to happen is we have to have, in accounting, we have to have a closing entry.
Now you’ll notice under the perpetual system that this closing entry isn’t required. But it is required under the periodic inventory system. We need that to establish a final cost of goods and, again, that is done at the end of that accounting period – whatever period of time you set for that.
So, there are some benefits here. The periodic system is very affordable. It’s very cheap. It’s what most small businesses are using. But this perpetual system gives you fully automated, real-time data.
Now, what should you use? Well, most companies are using a perpetual system because they’re using advanced inventory management software to track all of their inventory.
So if you’re a small business and you’re using this periodic system, and you’re growing, you might want to consider moving over to a perpetual system and getting the software that automates all your processes and gives you the real-time data and helps you be more competitive.
That’s it for this Whiteboard Wednesday. Join us again next week. Thanks.