Difference Between Periodic and Perpetual Inventory System

The periodic and perpetual inventory systems are two contrasting accounting methods that businesses use to track the quantity of goods in hand.  The inventory is physically counted at the end of the financial period to determine the cost of ending units in hand and the cost of goods sold under periodic inventory system. On the other hand, perpetual system updates the ending units and cost of goods sold continuously. The differences of these two inventory systems are further explained below separately.

Periodic Inventory System

Under periodic inventory system the inventory is counted physically after at the end of accounting period (may be weekly, monthly, quarterly or yearly) to track the quantity of goods in hand and cost of goods sold. It means merchandise inventory and cost of goods sold are not updated continuously. The firms record all purchases of merchandise into ‘Purchase’ account and each sale is recorded through a single journal entry like cash debit and sales credit. Thus, the cost of goods sold is not determined during accounting period. It is determined at the end of the accounting period as shown below:

The cost of merchandise inventory is computed under FIFO, LIFO or Weighted average method.

Journal Entries for Periodic Inventory System:

1. Purchased merchandise on cash for Rs. 5000.

Purchases                5000

              Cash                 5000

To record: The purchases of goods on cash.

2. Merchandise returned for Rs. 2000.

Cash                                   2000

        Purchase returned              2000

To record: The merchandise returned to supplier.

3. Sale is made on cash for Rs. 3000.

Cash          3000

        Sales           3000

To record: The sale of goods on cash.

  

4. Sale returned for Rs. 500.

Sales return          500

               Cash            500

To record: The goods were returned by customer.

Perpetual Inventory System

Under perpetual inventory system, merchandise inventory and cost of goods sold is updated continuously on each purchase and sale transaction. Here purchases are directly recorded in ‘Merchandise Inventory’ account, there is no need of ‘Purchases’ account.  For example, purchase transaction is made on cash, so merchandise inventory will be debited and cash will be credited. When sale is made on cash, two entries are recorded. In the first entry, cash is debited and sale is credited, while in second entry, cost of goods sold is debited and merchandise inventory is credited. Unlike periodic system, physical inventory count is not required as perpetual system provides units in hand and it’s cost at any time. This real time update gives insight into which of products are selling well and which are not. It allows management to have more inventory control.

Journal Entries for Perpetual Inventory System:

1. Purchased merchandise on cash for Rs. 5000.

Merchandise inventory         50000

           Cash                                     50000

To record: Purchased merchandise on cash.

2. Merchandise returned for Rs. 2000.

Cash                                           2000

         Merchandise inventory              2000

To record: Merchandise returned to supplier purchased on cash.

3. Sale is made on cash for Rs. 3000.

Cash                   3000

         Sales                  3000

To record: The sale of goods on cash.

Cost of goods sold                              2000      

             Merchandise inventory                  2000

To record: The cost of goods sold.

Note: The cost of goods sold is given by the perpetual system.

4. Sale returned for Rs. 500.

Sales return               500

              Cash                    500

To record: The merchandise was returned by customer.

Merchandise inventory                        500

                  Cost of goods sold                  500

To record: The cost of goods sold.