Perpetual and Periodic Stock Explained

Perpetual and Periodic Stock

Overview

Inventory is one of the most critical control systems in a business. There are many aspects in inventory that you need to manage i.e., the correct levels must be maintained, the stock must be purchased at the best possible price, and that the stock is stored in a safe/secure environment and many more.

In bookkeeping, there are two control methods for inventory. A business needs to evaluate and then make a decision which method to apply in their environment (in conjunction with their financial advisors). The available options are:

  • Perpetual / Integrated System
  • Periodic system

Perpetual Stock / Fully Integrated System

With the perpetual stock method, every time stock is bought or sold; the following will take place: 

  • The relevant GL accounts are automatically updated, including the stock account(s)
  • The cost price of the stock item is recalculated
  • The new stock quantity is calculated

The stock accounts are continuously or “perpetually” updated with this method.

Periodic Stock System

With this method, the following will happen when stock is purchased or sold.

  • Only some GL accounts are updated. The Inventory Control account and Cost of Sale account are not updated when sales are made. You will need to update these accounts manually on a periodic basis. This time frame will depend on your business; in some companies, it is a weekly procedure; in others, a monthly, quarterly, or annual occurrence.
  • The cost price of the stock item is recalculated
  • The new stock quantity is calculated
The stock accounts are periodically updated with this method.
 
By way of illustration, the following transactions will be used in the below T accounts.
 
  1. Purchase stock  – 10 items @ R10
  2. Sell stock – 4 items @ R15
  3. Opening and Closing Stock journals (only applicable with the Periodic system) 
Please note that in this example, we are going to ignore tax and assume the stock was bought on credit. 

From the above, it is clear that with the Perpetual system, you have a clear view of the financial status of the business, without the requirement to process additional journals.

It is crucial to take into consideration that because the Cost of Sale transaction is done automatically, the following key components must be taken into account:

  • Cost prices of stock must be accurate; incorrect prices will result in the wrong Cost of Sales value that will be updated in the GL
  • Negative quantities must not be allowed in the accounting system. If this option is activated in the system, the cost prices are usually also incorrect

The end result will be that the Cost of Sales values will be incorrect and can have a material impact on the financials of the business.

 

Based on the above, there are several factors that must be taken into consideration when you decide which control system to use. Here are some considerations:

  • If you are primarily a service organisation and you do not sell physical items, do not integrate
  • If you sell mainly physical goods, you should consider integration depending on the size of your
    company and the type of goods that you sell.
  • If you control inventory accurately and you do not allow the theoretical quantity on hand to be
    negative, you should integrate inventory.
  • If your theoretical quantity on hand is often negative and inventory costs vary considerably, do not integrate inventory.

In the majority of systems, you can change between the 2 systems. Changing from 1 system to another must be done in consultation with your financial and system support consultants.

The best practice is to make a change at the financial yearend.

Once a decision is made to change from 1 system to another, devise a plan of action with your support team.

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