Perpetual inventory system

Definition

A perpetual inventory system continuously tracks inventory levels by recording every purchase and sale of inventory in real-time. This method provides up-to-date information on inventory quantities and costs.

5 Must Know Facts For Your Next Test

1. It requires sophisticated software or systems to record transactions in real-time.
2. Inventory accounts are updated immediately after each purchase or sale.
3. Helps in maintaining accurate financial statements and timely detection of discrepancies.
4. Commonly used by businesses that require precise inventory management, such as retail stores and e-commerce platforms.
5. Allows for the use of various inventory valuation methods like FIFO, LIFO, or weighted average.

Review Questions

• How does a perpetual inventory system differ from a periodic inventory system?
• What are the advantages of using a perpetual inventory system for a retail business?
• How does the perpetual inventory system aid in accurate financial reporting?

Related terms

Periodic Inventory System:

An inventory tracking method where updates to the general ledger occur at specific intervals, typically at the end of an accounting period.

FIFO (First-In, First-Out): An inventory valuation method where the oldest items are recorded as sold first.

LIFO (Last-In, First-Out): An inventory valuation method where the most recently produced items are recorded as sold first.