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Inventory Recording Systems

"Two ways to track stock - perpetual (real-time) vs periodic (snapshot)."

Businesses use different systems to record and track inventory. The two main systems are Perpetual and Periodic.

Two Inventory Systems

Perpetual System
↓
Periodic System

Perpetual Inventory System

Definition: Inventory records are updated continuously after each transaction (purchase/sale).

How It Works:

  • Every purchase → Increase inventory account
  • Every sale → Decrease inventory account AND record cost of goods sold
  • Always know current inventory balance

Who Uses: Large retailers with barcode scanners, modern businesses with ERP systems

Example: Perpetual System

Transactions:

  1. Jan 5: Purchased 100 units @ ₹10 = ₹1,000
  2. Jan 10: Sold 60 units @ ₹15 = ₹900 revenue

Entries:

Purchase (Jan 5):

Inventory A/c                   Dr.    ₹1,000
    To Cash/Creditors A/c                  ₹1,000

Sale (Jan 10):

Cash/Debtors A/c                Dr.    ₹900
    To Sales A/c                           ₹900

Cost of Goods Sold A/c          Dr.    ₹600 (60 × ₹10)
    To Inventory A/c                       ₹600

Result: Inventory balance shows ₹400 (40 units) at any time.

Periodic Inventory System

Definition: Inventory is counted physically at the end of the period. Records updated only after count.

How It Works:

  • Purchases recorded in Purchases Account (not Inventory)
  • Sales recorded in Sales Account
  • At year-end: Physical count done
  • Closing Stock calculated
  • COGS derived from formula

Formula:

COGS = Opening Stock + Purchases - Closing Stock

Who Uses: Small businesses, traditional shops without real-time tracking

Example: Periodic System

Transactions:

  1. Jan 5: Purchased 100 units @ ₹10 = ₹1,000
  2. Jan 10: Sold 60 units @ ₹15 = ₹900 revenue
  3. Jan 31: Physical count shows 40 units

Entries:

Purchase (Jan 5):

Purchases A/c                   Dr.    ₹1,000
    To Cash/Creditors A/c                  ₹1,000

Sale (Jan 10):

Cash/Debtors A/c                Dr.    ₹900
    To Sales A/c                           ₹900
(No entry for COGS at time of sale)

Year-End Adjustment:

  • Physical count: 40 units @ ₹10 = ₹400
  • Closing Stock = ₹400
  • COGS = ₹0 + ₹1,000 - ₹400 = ₹600 (calculated, not tracked)

Detailed Comparison

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Advantages of Perpetual System

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Advantages of Periodic System

✅ Simple: No complex software needed
✅ Low Cost: No barcode scanners or IT investment
✅ Suitable for Small Business: Local kirana store, small traders
✅ Less Time-Consuming: No continuous updation

Real-World Case Study

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When Physical Count is Still Needed

Even with Perpetual System:

  • Annual/Periodic Verification: Reconcile system vs actual
  • Detect Shrinkage: Theft, damage, errors
  • Audit Requirements: External auditors verify

Difference between system and actual:

  • Shrinkage (loss due to theft/damage)
  • Recording errors (wrong quantities entered)
  • Damaged goods not recorded

Modern Hybrid Approach

Best Practice: Use Perpetual System with periodic physical verification.

Process:

  1. Daily: Perpetual tracking via POS/ERP
  2. Monthly/Quarterly: Sample counting (cycle counting)
  3. Annually: Full physical count
  4. Reconcile differences and adjust records

Journal Entries Comparison

Perpetual System

Purchase:

Inventory A/c                   Dr.
    To Creditors A/c

Sale:

Debtors A/c                     Dr.
    To Sales A/c

COGS A/c                        Dr.
    To Inventory A/c

Periodic System

Purchase:

Purchases A/c                   Dr.
    To Creditors A/c

Sale:

Debtors A/c                     Dr.
    To Sales A/c
(No COGS entry)

Year-End:

Closing Stock A/c               Dr.
    To Trading A/c

Quiz: Inventory Recording Systems

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