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Home >> Inventory Accounting Topics

The Perpetual Inventory System

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, 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 will 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

Perpetual Inventory System - AccountingTools

http://www.accountingtools.com/perpetual-inventory-system[3/29/2015 11:08:35 AM]

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

Related Topics

Periodic inventory system

What are perpetual LIFO and periodic LIFO?

What is the difference between the periodic and perpetual inventory systems?

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