The Institute of Cost and Management Accountants of England and Wales (CIMA), defines perpetual inventory as ‘A system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balances.’.
What this means for a business in practice is that sales or purchases of inventory are recorded immediately and therefore, this system provides accurate, real-time reporting of inventory levels and values.
Perpetual inventory systems have become much more popular with the improvements in technology, which allow a business to use computers and computerised systems to easily track inventory levels across several products or materials. Without these new and improved technologies, this would have been done with a periodic inventory system – a huge manual task for someone to complete daily, which would have been extremely time-consuming.
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The automation of the computer can track inventory levels much quicker, and provides automated checks at specific intervals. As part of this system, the accounting entries for the purchase and sale of stock can also be viewed; not only can you see real time stock levels (to avoid a dreaded stock out) but you also have the option to see basic running profit and loss reports.
Businesses using a perpetual inventory method may still wish to perform regular stock checks to ensure that physical stock on hand does align with the computerised records. This can be used to verify stock values in management figures, but also to ensure there is no theft or loss of stock.
In valuing stock using the perpetual inventory system, businesses can still use FIFO (first in first out), LIFO (last in first out) or AVCO (average cost). However, under IFRS, only FIFO or AVCO can be used when preparing the statutory accounts.