This article looks at the meaning of the perpetual inventory. It’s also important to understand the relationship of the physical inventory in real time compared to the general ledger book value. This article also looks at the inventory process and how a perpetual inventory is maintained in general terms.
What is a Perpetual Inventory Control System?
In accounting terms the word perpetual means continuous. Normally a perpetual inventory is updated in real time. As a product is sold, the inventory is updated instantaneously. Likewise when the product is receipted, the stock record is updated at the moment of receipt. In contrast, an inventory that is only updated with a physical count would not be considered a perpetual inventory control system.
Point of Sale and Perpetual Inventory System
The development of computerized inventory systems has made of the task of maintaining a perpetual inventory a much easier task. As a product is sold, a computerized point of sale system instantly updates the inventory. Most point of sale systems decreases the inventory automatically when an invoice is created. If a product is returned, the credit invoice will automatically increase the physical inventory when the credit is written.
Perpetual Inventory System and Accounting Interface
A true point of sale system will not only update a perpetual inventory, it will also create accounting journal entries. The journal entries will then post to the general ledger. The complete interface between the perpetual inventory and accounting occurs automatically when the invoice is created. Besides updating the inventory general ledger, the invoice will also update other general ledgers like:
- sales
- accounts receivables
- cost of goods sold
- cash
- freight
- sales tax
Depending on the business model, other general ledger accounts may also be updated besides the typical accounts listed above.
Physical Inventory Value vs. Book Value
When inventories are updated periodically, there is often a gap between the general ledger and physical inventory value. Since the general ledger is updated instantaneously with a perpetual inventory system, there tends to be a more accurate balance between the physical inventory and the book value than other types of systems. There are however other factors that can make it more difficult to have an accurate balance between the general ledger book value and the physical inventory.
Delays in posting receipts or delays in posting supplier invoices are some examples that can create an out of balance condition. If for example goods were posted into the perpetual inventory system and the suppliers invoice is posted to the general ledger a few days later, the general ledger would be understated. Returns to suppliers and work in process are other examples of an out of balance condition.
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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