Answer to Question #208199 in Management for Cessy

Question

The periodic and the perpetual inventory systems are two methods that companies use to account for inventories. Briefly describe the major features of each system and explain why a physical inventory is necessary under both systems.

Answer 1

The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS).

while the perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.

Periodic inventory accounting systems are normally better suited to small businesses, while businesses with high sales volume and multiple retail outlets (like grocery stores or pharmacies) need perpetual inventory systems.

Periodic inventory accounting systems are normally better suited to small businesses due to the expense of acquiring the technology and staff to support a perpetual system. A business, such as a car dealership or art gallery, might be better suited to the periodic system due to the low sales volume and the relative ease of tracking inventory manually.

Under the perpetual system, managers are able to make the appropriate timing of purchases with a clear knowledge of the quantity of goods on hand at various locations. Having more accurate tracking of inventory levels also provides a better way of monitoring problems such as theft thus necessary.