Definition: A perpetual inventory system is a method of tracking and recording inventory and costs of goods sold on a continual basis, so a current inventory balance can be calculated in real time. In other words, a perpetual inventory system records all inventory transaction in real time, so the accounting system can display the current inventory balance at any point in time.
What Does Perpetual Inventory System Mean?
This might sound like common sense, but keeping a running total of inventory was extremely time consuming and difficult before computers and other input devices like bar code scanner took over accounting systems. Companies used to use the periodic inventory system , which recorded inventory transactions in batches at specific times. For example, at the end of each month the bookkeeper would enter all of the purchases and costs in for the month at one time.
Since the periodic inventory system is only updated occasionally, managers never have current and accurate financial information to base their purchasing or manufacturing decisions on.
Perpetual inventory systems fix this problem. As soon as an inventory transaction takes place, it is entered into the system and inventory balances and costs are updated automatically. Managers can use current inventory reports any time because the system always keeps a real time balance of inventory.
An example of a perpetual inventory system is a modern shipping and receiving department. Every box that is delivered is scanned into the accounting system and adding to the inventory balance automatically. Products that are being shipped out to customers are marked with a bar code and scanned when they leave the shipping dock. This removes them from the accounting system and decreases the inventory.
As you can see, this modern system updates itself in real time. No transactions need to be batch processed like in a periodic inventory system and all of the reports are always current.