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Inventory Record Systems

There are two principle systems of determining the physical quantities and monetary value of inventories sold and in hand.


Periodic inventory system


Periodic inventory system is a method of ascertaining the value of inventory by taking an actual physical count. All the inventory items on hand are physically counted on a particular date on which the value of inventory is required. This system is also called the physical inventory system. The cost of goods sold is determined by using the formula.



This system is simple and less expensive, but suffers from various limitations. Physical stock taking is required more than once in a year for preparation of quarterly or half yearly financial systems thereby making the system more expensive. Physical count requires closure of normal operations of business. Inventory control is not possible

Perpetual inventory system


Perpetual inventory system is a system of recording the inventory balances after each receipt and issue. With perpetual inventory system, the inventory record for each item of inventory is updated for each purchase and each sale as they occur.

In other words, the perpetual inventory system keeps a running record of inventory balances. In order to ensure accuracy, physical stock should be checked and compared with the recorded balances.

Under this system, cost of goods issued is directly determined and stock of goods is taken as a balancing figure (closing stock) with the help of stock ledger.


Distinction between periodic inventory system and perpetual inventory system


Periodic Inventory System

Perpetual Inventory System

This system is based on physical verification

It is based on book records

This system provides information about stock and cost of sales

It provides continuous information about stock and cost of sales

This system determines inventory and takes cost of goods sold as residual figure

It directly determines cost of sales and computes stock as balancing figure

Cost of goods sold includes loss of goods as goods not in stock are assumed to be sold

Closing inventory includes loss of goods as all unsold goods are assumed to be in inventory

Under this method, inventory control is not possible

Inventory control can be exercised under this system

This system is simple and less expensive

It is a costlier method

Periodic system requires closure of business for the counting of stock

Inventory can be determined without affecting the operations of business

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