Exploring Periodic and Perpetual Inventory Systems
The way you track your inventory directly influences your company’s perceived cash flow status and ability to invest in continued growth opportunities. While running a small business, you can choose between periodic and perpetual inventory systems, which both have their own benefits and drawbacks to consider. Here’s what you need to know about these two systems.
The periodic system utilizes the ending balance from the prior term to start off the new month. The adjustments only come in at the end of the defined period, which may be once a month or less often, depending on the structure of your company. To keep your books balanced, you must run through your physical inventory annually to match up the figures with the actual existing products in your possession. The periodic system does not reflect the inventory status in real time, but it does take a lot less time to compile than the perpetual system does.
When you choose the perpetual system, you will keep a running balance of your inventory totals in Missouri on a continual basis. This method does not utilize a separate purchase account, so the accounts receivable records receive debits for expenses and credits for sales. The physical inventory readings must be matched up to the books to verify the accuracy of the perpetual system status. This method is highly accurate in real time, but exceedingly time intensive, especially as your company grows.
Selecting Your Ideal Inventory System
You will need to reflect on your company size, accounting methods, inventory needs and sales figures to best determine the inventory system that will benefit your business. You should also weigh your own ability to invest time into the inventory process to determine if the perpetual or periodic inventory systems will fit into your workday.
If you need help identifying and establishing the best inventory system for your company, contact the accounting professionals at accountRely in St. Louis, MO for assistance today.