BBS Second year eBooks | Business Communication | Cost and Management Accounting | Organizational Behavior | Human Resource Management | Fundamentals of Financial Management<\/p><\/div>\n

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Inventory Systems | Periodic Inventory System | Perpetual Inventory System<\/span><\/b><\/h3>\n

Inventory (stock or merchandise) is one of the most important current assets of doing business.<\/span><\/p>\n

For manufacturing company, there are three types of inventories; raw materials, work in progress and finished goods.<\/span><\/p>\n

For repackaging or assembled company, there are two types of inventories; they are parts or semi-finished inventories. <\/span><\/p>\n

For trading company, there in only one inventory i.e. finished goods.<\/span><\/p>\n

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Every business organization needs sufficient inventory for smooth running on its activities. <\/span><\/p>\n

It serves as link between production and distribution processes. <\/span><\/p>\n

Merchandising companies determine the quantity of inventory items by a physical count. <\/span><\/p>\n

In a literal sense, inventory refers to stocks of anything necessary to do business. <\/span><\/p>\n

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(A) Periodic Inventory System<\/span><\/b><\/h4>\n

Under a periodic inventory system, the quantity of inventory in hand is determined only periodically. <\/span><\/p>\n

In this system, the physical inventory count is taken once a year at the end of accounting period. <\/span><\/p>\n

However, most companies prepare of quarterly financial data; therefore, they need more current information regarding their inventory levels to protect against shortage or over purchasing.<\/span><\/p>\n

As a result, many companies choose a\u00a0modified perpetual inventory system.<\/span><\/p>\n

In modified system,\u00a0increases or decreases in quantities are kept in units NOT in amount (<\/span>$<\/span>\/\u20b9\/Rs etc).<\/span><\/p>\n

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Modified perpetual inventory system is just a memorandum of the double entry system which helps in determining the level of inventory at any point in time. <\/span><\/p>\n

What method of a company uses to maintain inventory record system, it takes a physical inventory once a year. <\/span><\/p>\n

No matter what type of inventory records are used or how well organized maintains inventory system, the danger of loss and error is always present. <\/span><\/p>\n

There is chance to waste, breakage, theft, improper entry, failure to prepare or record requisitions etc. <\/span><\/p>\n

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Advantages of periodic inventory system<\/span><\/b><\/p>\n

Some important advantages of periodical inventory are:<\/span><\/p>\n

This system saves much time and labour costs.<\/span><\/p>\n

It does not need to continuous records.<\/span><\/p>\n

Generally, it is simpler system to administer as compared with the perpetual inventory system.<\/span><\/p>\n

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Disadvantages of periodic system<\/span><\/b><\/p>\n

Some important disadvantages of periodical inventory are:<\/span><\/p>\n

Inventory units are counted only once at the end of accounting period, it takes more time.<\/span><\/p>\n

Inventory value is determined at the end of accounting period; so there is very little control over inventory movements. <\/span><\/p>\n

The value of inventory lost, stolen or spoiled is difficult to ascertain; this may significantly affect profits and net worth.<\/span><\/p>\n

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(B) Perpetual Inventory System<\/span><\/b><\/h4>\n

Perpetual inventory means continuous checking and supply of the inventory. <\/span><\/p>\n

This continuous checking is done with the help of store ledger and storekeeper. <\/span><\/p>\n

It helps to regular supply of materials to production department. <\/span><\/p>\n

It is possible that the balance of stock shown by bin card may be differ from actual balance. <\/span><\/p>\n

This different may be due to avoidable and unavoidable causes.<\/span><\/p>\n

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Definition of perpetual inventory system <\/span><\/b><\/p>\n

According to H G Wheldon, <\/span><\/i>\u201cPerpetual inventory system is a system of records maintain by the controlling department, which reflect the physical movement of stock and their current balance.\u201d <\/span><\/i><\/p>\n

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Avoidable causes<\/span><\/b> <\/b><\/p>\n

Clerical mistake like wrong posting and non-posting.<\/span><\/p>\n

Pilferage and theft<\/span> of inventory.<\/span><\/p>\n

Carelessness in inventory handing.<\/span><\/p>\n

Short or over issue of materials.<\/span><\/p>\n

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Unavoidable causes <\/span><\/b><\/p>\n

Actual balance of inventory may be less due to shrinkage and evaporation.<\/span><\/p>\n

Actual balance of inventory may be more due to moisture or counting mistake.<\/span><\/p>\n

Actual balance of inventory may be less due to loss by fire.<\/span><\/p>\n

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Advantage of perpetual inventory<\/span><\/b><\/p>\n

Some important advantages of perpetual inventory are:<\/span><\/p>\n

It helps to prepare periodical statement without taking physical inventory.<\/span><\/p>\n

It helps to records accurate inventory up-to-date.<\/span><\/p>\n

It helps to find out error of recording and shortage of materials.<\/span><\/p>\n

It helps to control excess capital investment on inventory.<\/span><\/p>\n

It helps to maintain a system of internal checking in inventory.<\/span><\/p>\n

It helps to find out closing <\/span>inventory to prepare final account.<\/span><\/span><\/p>\n

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Disadvantage of perpetual inventory<\/span><\/b><\/p>\n

The main disadvantages of perpetual inventory are:<\/span><\/p>\n

This is very expensive system.<\/span><\/p>\n

This is not suitable for small organization.<\/span><\/p>\n

It represents only figure not actual inventory value.<\/span><\/p>\n

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Difference between Perpetual and Periodic Inventory<\/span><\/b><\/h4>\n\n\n\n\n\n\n\n\n\n\n\n

\n Bases <\/span><\/b><\/p>\n<\/td>\n	\n Perpetual Inventory System<\/span><\/b><\/p>\n<\/td>\n	\n Periodic Inventory System<\/span><\/b><\/p>\n<\/td>\n<\/tr>\n
\n Use of account <\/span><\/p>\n<\/td>\n	\n Inventory account is used to record it.<\/span><\/p>\n<\/td>\n	\n Purchase account is used to record it.<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Basis<\/span><\/p>\n<\/td>\n	\n Book records<\/span><\/p>\n<\/td>\n	\n Physical verification<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Updating<\/span><\/p>\n<\/td>\n	\n Continuously<\/span><\/p>\n<\/td>\n	\n At the end of the accounting period.<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Information<\/span><\/p>\n<\/td>\n	\n Inventory and cost of sales.<\/span><\/p>\n<\/td>\n	\n Inventory and cost of goods sold.<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Balancing figure<\/span><\/p>\n<\/td>\n	\n Inventory<\/span><\/p>\n<\/td>\n	\n Cost of goods sold<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Possibility<\/span><\/p>\n<\/td>\n	\n Yes, possible to control.<\/span><\/p>\n<\/td>\n	\n No, control is not possible.<\/span><\/p>\n<\/td>\n<\/tr>\n
\n influence<\/span><\/p>\n<\/td>\n	\n This method does not influence the business operation.<\/span><\/p>\n<\/td>\n	\n During valuation, the business operations need to be stopped.<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Reporting <\/span><\/p>\n<\/td>\n	\n It is given in inside the trial balance. <\/span><\/p>\n<\/td>\n	\n It is given in outside of trial balance viz in additional information. <\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Which inventory valuation method is best, periodic or perpetual inventory system?<\/span><\/b><\/h4>\n There are advantages and disadvantages of both FIFO and LIFO method. <\/span><\/p>\n Choosing the right inventory valuation method is important because it has a direct impact on the business\u2019s profit margin. <\/span><\/p>\n Choosing the method lead to drastic differences in the cost of goods sold, net income and ending inventory.<\/span><\/p>\n \u00a0<\/span><\/p>\n Apply for loan <\/span><\/b><\/p>\n If firm is going to take loan by keeping stock as collateral, in such a condition value of stock should be high. <\/span><\/p>\n Higher valuation gives high assurance to lender.<\/span><\/p>\n If prices are increasing throughout the year, FIFO gives higher value for closing inventory.<\/span><\/p>\n If prices are decreasing throughout the year, LIFO gives higher value for closing inventory.<\/span><\/p>\n \u00a0<\/span><\/p>\n Attracting investors <\/span><\/b><\/p>\n High profit margin gives a lot of attention to investors and shareholders. <\/span><\/p>\n If firm is looking for new funding opportunity and want to please shareholders, they must be attracted.<\/span><\/p>\n If prices are increasing due to inflation, FIFO valuation will be beneficial.<\/span><\/p>\n If prices are decreasing due to deflation, LIFO valuation will be beneficial. <\/span><\/p>\n \u00a0<\/span><\/p>\n Saving taxes <\/span><\/b><\/p>\n If firm wants to cut down its tax liabilities, LIFO valuation will save some money under inflation situation. <\/span><\/p>\n LIFO shows less profit than FIFO.<\/span><\/p>\n Fewer profits means less tax, more saving <\/span><\/p>\n \u00a0<\/span><\/p>\n ***** #EP<\/span>Online<\/span>Study *****<\/span><\/p>\n Thank you for investing your time.<\/span><\/i><\/p>\n Please comment on article.<\/span><\/i><\/p>\n You can help me by sharing this article at your social media platform.<\/span><\/i><\/p>\n \u00a0<\/span><\/p>\n Jay G<\/span>o<\/span>o<\/span>g<\/span>l<\/span>e<\/span>, Jay YouTube<\/span>, Jay Social Media<\/span><\/span><\/p>\n \u091c\u092f<\/span> \u0917\u0942<\/span>\u0917<\/span>\u0932<\/span>, <\/span>\u091c\u092f<\/span> \u092f\u0941\u091f\u094d\u092f\u0941\u092c<\/span>, <\/span>\u091c\u092f<\/span> \u0938\u094b\u0936\u0932<\/span> \u092e\u093f\u0921\u093f\u092f\u093e<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n  <\/p>\n","protected":false},"excerpt":{"rendered":" \u00a0 Concept of Inventory Management | Stock Management Inventories (stocks, merchandise) are the part of current assets. Generally, it is applied or calculated for one year. There are two types of inventories; they are merchandise and manufacturing. Merchandise Inventory Manufacturing Inventory Beginning inventory Raw Material (cotton, jute, leather, woods etc) Ending inventory Work in progress […]<\/p>\n","protected":false},"author":19997,"featured_media":5673,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2306,2725,11,117,2135],"tags":[2653,2734,2733,591,2729,2142,2732,2731,2730,2728,2106,614,2727],"writers":[144],"yoast_head":"\n