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Perpetual Inventory System Guide

The perpetual inventory system continually updates inventory records to account for additions and subtractions like received or sold items. This provides up-to-date balances but calculated levels may differ from actual amounts over time. Periodic physical counts and adjustments help ensure accuracy. Properly managed, perpetual inventory yields reasonably accurate ongoing results, especially when integrated with barcode scanning or POS systems. It is required for materials requirements planning.

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118 views3 pages

Perpetual Inventory System Guide

The perpetual inventory system continually updates inventory records to account for additions and subtractions like received or sold items. This provides up-to-date balances but calculated levels may differ from actual amounts over time. Periodic physical counts and adjustments help ensure accuracy. Properly managed, perpetual inventory yields reasonably accurate ongoing results, especially when integrated with barcode scanning or POS systems. It is required for materials requirements planning.

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merlitaramos
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Perpetual Inventory System Overview

Under the perpetual inventory system, an entity continually updates its inventory records
to account for additions to and subtractions from inventory for such activities as:

 Received inventory items

 Goods sold from stock

 Items moved from one location to another

 Items picked from inventory for use in the production process

 Items scrapped

Thus, a perpetual inventory system has the advantages of both providing up-to-date
inventory balance information and requiring a reduced level of physical inventory counts.
However, the calculated inventory levels derived by a perpetual inventory system may
gradually diverge from actual inventory levels, due to unrecorded transactions or theft, so
you should periodically compare book balances to actual on-hand quantities (typically
using cycle counting) and adjust the book balances as necessary.

Perpetual inventory is by far the preferred method for tracking inventory, since it can
yield reasonably accurate results on an ongoing basis, if properly managed. The system
works best when coupled with a computer database of inventory quantities and bin
locations, which is updated in real time by the warehouse staff using wireless bar code
scanners, or by sales clerks using point of sale terminals. It is least effective when changes
are recorded on inventory cards, since there is a significant chance that entries wil l not be
made, will be made incorrectly, or will not be made in a timely manner.

The perpetual inventory system is a requirement for any organization planning to install a
material requirements planning system.

Perpetual Inventory Journal Entries


The following example contains several journal entries used to account for transactions in
a perpetual inventory system:

1. To record a purchase of $1,500 of widgets that are stored in inventory:


Debit Credit

Inventory 1,500

Accounts payable 1,500

2. To record $300 of inbound freight cost associated with the delivery of inventory:

Debit Credit

Inventory 300

Accounts payable 300

3. To record a sale of widgets from inventory for $3,000, for which the associated
inventory cost is $1,800:

Debit Credit

Accounts receivable 3,000

Revenue 3,000

Cost of goods sold 1,800

Inventory 1,800
4. To record a downward inventory adjustment of $800, caused by inventory theft, and
detected during an inventory count:

Debit Credit

Inventory shrinkage expense 800

Inventory 800

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