Perpetual or Periodic Inventory?

Owned by Julie Hanlon
Mar 26, 2021
2 min read

Question

Does Jiwa use the perpetual or periodic inventory method?

  

Answer

Jiwa uses the perpetual inventory method.

Periodic and perpetual inventory systems are two contrasting accounting methods that businesses use to track the number of products they have available. Overall, the perpetual inventory system offers many benefits over the periodic system and is now used by all major businesses.

  • 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.

  • Periodic inventory accounting systems are normally better suited to small businesses, while businesses with high sales volume and need perpetual inventory systems.

The periodic system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS). Merchandise purchases are recorded in the purchases account. The inventory account and the cost of goods sold account are updated at the end of a set period—this could be once a month, once a quarter, or once a year. Cost of goods sold is an important accounting metric, which, when subtracted from revenue, shows a company's gross margin. 

Cost of goods sold is calculated as follows:

Opening Inventory

+ Purchases

- Closing Inventory 

= Cost of Goods Sold

Since businesses often carry products in the thousands, performing a physical count can be difficult and time-consuming. For this reason, many companies perform a physical count only once a quarter or even once a year. For companies under a periodic system, this means that the inventory account and cost of goods sold figures are not necessarily very fresh or accurate.

By contrast, the perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold. Purchases and returns are immediately recorded in the inventory account. As long as there is no theft or damage, the inventory account balance should be accurate. Jiwa updates the cost of goods sold account continuously as each sale is made.

Under Jiwa's 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.