Perpetual inventory method is a system where inventory is calculated instantly at the time of each transaction. When a product is bought or sold, the quantity and cost of inventory are updated immediately. This method allows constant monitoring of inventory, which is useful for businesses with fast-moving product flows.
Perpetual Inventory Method Accounting Process
In this system every transaction is recorded immediately.
Purchase of inventory items: When stock goods are purchased, the stock account is updated.
Example 01: Suppose 100 units of product are purchased at $10 per unit, then the entry will be:
Dr. Reserve $1,000
Cr. Cash/Debt $1,000
Sale of goods: When goods are sold, two entries are made:
To record the sale:
Debit: Cash/Payable
Credit: Sales
To update inventory account:
Debit: Cost of Goods Sold (COGS)
Credit: The Reserve
Example 02: If 50 units of product are sold and the selling price is $15 per unit, and the cost of each unit is $10:
Sales Entry:
Dr. Cash $750
Cr. Sales $750
Cost Entry:
Dr. COGS $500 (50 units × $10)
Cr. Stock Items $500
Advantages of permanent method:
i) Inventory can be monitored in real-time.
ii) Product shortages or theft can be detected quickly.
iii) It is ideal for businesses with fast transactions.
Disadvantages:
i) The cost of maintaining computerized systems is high.
ii) For small businesses this can be a bit complicated.
More Resources