Introduction to Perpetual Inventory System

What you will learn to do: Accounting for inventory under the perpetual method

In the past, because of the amount of paperwork involved, only companies that sold merchandise with a high individual unit value, like cars, furniture, and appliances, used perpetual inventory procedure. Today, computerized cash registers, scanners, and accounting software programs automatically keep track of inflows and outflows of each inventory item. Computerization makes it economical for retail stores to use perpetual inventory procedure even for goods of low unit value, like groceries.

Under perpetual inventory procedure, the Merchandise Inventory account provides close control by showing the cost of the goods that are supposed to be on hand at any particular time. Companies debit the Merchandise Inventory account for each purchase and credit it for each sale so the current balance is shown in the account at all times. Firms also maintain detailed unit records showing the quantities of each good type that should be on hand. Company personnel also take an occasional physical inventory by actually counting the units of inventory on hand. Then they compare this physical count with the records showing the units that should be on hand.

Before you dive into the nuances of the perpetual system, here’s a quick summary of the differences between the two methods of tracking inventory and computing COGS:

You can view the transcript for “Perpetual vs Periodic Inventory System (Financial Accounting Tutorial #29)” here (opens in new window).