Perpetual inventory continuously tracks and records items as they are added to or subtracted from the inventory. And it keeps track of the cost of goods purchased and sold. Physical inventory uses a periodic schedule to manually count and record items and keep track of the cost of what’s bought and sold.

The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS). The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.

With a perpetual inventory, all transactions involving costs of merchandise get recorded immediately as they occur. For instance, take grocery stores – each time a product is bought and scanned, the system updates inventory levels in the database.

The primary case where a periodic system might make sense is when the amount of inventory is very small, and where you can visually review it without any particular need for more detailed inventory records.

One example of a business that would use a periodic system is a food bank. They would frequently count the physical inventory to determine the closing inventory quantity.”

A perpetual inventory system is a program that continuously estimates your inventory based on your electronic records, not a physical inventory. This system starts with the baseline from a physical count and updates based on purchases made in and shipments made out.

Periodic method calculates cost of goods sold at the end of each period and the perpetual method calculates cost of goods sold with each sales transaction. Periodic method calculates cost of goods sold at the beginning of the period and the perpetual method calculates cost of goods sold with each purchase transaction.

A perpetual inventory system is superior to the older periodic inventory system because it allows for immediate tracking of sales and inventory levels for individual items, which helps to prevent stockouts.

Due to the large volume of items in and out Amazon uses perpetual inventory systems at their warehouses. They also stock a wide variety of items albeit in a much lower volume than Amazon which is why they can manage to use the periodic inventory system.

A periodic inventory system is best suited for smaller businesses that don’t keep too much stock in their inventory. For such businesses, it’s easy to perform a physical inventory count. It’s also far simpler to estimate the cost of goods sold over designated periods of time.

What Types of Companies Use Periodic Inventory? Clothing Stores. Clothing stores use periodic inventory because they have a high volume of sales with moderately priced goods. Grocery Stores. Grocery stores stock large amounts of small goods. Convenience Stores. Convenience stores also sell a wide variety of small items at low prices. Large Discount Stores.

The perpetual inventory formula is very straightforward. Beginning Inventory (usually from a physical count) + receipts – shipments = Ending Inventory.

Here are some of the cons of periodic inventory systems that you will want to appreciate: Inaccuracies. One of the worst things you can say about a periodic inventory system is the fact that you are dealing with something that can be highly inaccurate. Labor Intensive. If you have a very limited inventory, with only a few dozen orders for the year, using the periodic inventory system isn’t all that difficult. Exercising Control.

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.