Perpetual inventory system
Definition
A perpetual inventory system is a method of tracking inventory that updates quantities and costs continuously, recording each purchase and sale as it happens. Cost of goods sold is recorded at the time of each sale, so inventory balances are always current in the books.
Why it matters
You can see stock levels and gross profit at any moment without waiting for a physical count. It makes reordering, spotting shrinkage, and producing monthly financials much easier.
Example
A shop sells a lamp for $80 that cost $50. Under a perpetual system, it records two entries at the time of sale: debit Cash $80, credit Sales revenue $80; and debit Cost of goods sold $50, credit Inventory $50. The inventory account immediately reflects one fewer lamp.
Common questions
Do I still need physical counts with a perpetual inventory system?
Yes. Periodic physical counts or cycle counts are still needed to catch theft, damage, and recording errors, and the books are adjusted to match the count.
What is the main difference between perpetual and periodic inventory?
A perpetual system updates inventory and cost of goods sold with every transaction, while a periodic system updates them only at the end of a period after a physical count.
Related Terms in Purchasing & Inventory
Periodic inventory system
A periodic inventory system is a method of tracking inventory where purchases are recorded in a purchases account and inventory is updated only at the end of a period based on a physical count. Cost of goods sold is calculated as a single figure at period end.
Inventory Valuation
Determining the monetary value of stock on hand, which sets both the balance-sheet asset and cost of goods sold. The method chosen, FIFO, LIFO or weighted average, changes reported profit when input prices move, so it must be applied consistently.
LIFO (Last In, First Out)
An inventory costing method that charges the most recently purchased stock to cost of sales first. In a rising-price environment it reports higher cost of sales and lower profit than FIFO. Permitted under US GAAP but prohibited under IFRS.
Weighted Average Cost
An inventory method valuing every unit at the average cost of all units available, recalculated as new stock arrives. It smooths the effect of price volatility and is permitted under both GAAP and IFRS.
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