Difference Between Perpetual Inventory System and Continuous Stock Taking

Key Difference – Perpetual Inventory System vs Continuous Stock Taking
 

The key difference between perpetual inventory system and continuous stock taking is that perpetual inventory system is a method of inventory valuation where the increase or decrease in inventory is recorded immediately following a sale or purchase whereas continuous stock taking refers to the exercise of physical checking or counting of inventory held by the entity on a regular basis. Inventory is one of the most vital current assets for an organization. While both of these procedures are very important as far as inventory is concerned, perpetual inventory system is a stock valuation system while continuous stock taking is a method of inspecting stock.

CONTENTS
1. Overview and Key Difference
2. What is Perpetual Inventory System
3. What is Continuous Stock Taking
4. Side by Side Comparison – Perpetual Inventory System vs Continuous Stock Taking
5. Summary

What is Perpetual Inventory System?

Perpetual inventory system is a method of inventory valuation where the increase or decrease in inventory is recorded immediately following a sale or purchase. This system keeps continuous track of inventory balances and provides complete details of changes in inventory through immediate reporting.

The main advantage of perpetual inventory system is that it shows how much inventory is available at any given point of time and is a successful way of preventing stock-outs. Furthermore, since inventory levels are updated on a real time basis, the balance in the inventory account and the cost of goods sold account remains correct throughout the accounting year. This is vital since inventory is one of the most significant current assets and ratios such as the inventory turnover ratio should be calculated for working capital management decision making. At the year end, the perpetual system will compare the physical inventory balance with the accounting records to investigate whether there are any inconsistencies.

E.g. DEF Company uses a perpetual inventory system and records each purchase and sale as it occurs for the month of May 2017.

What is Continuous Stock Taking?

Continuous stock taking refers to the exercise of physical checking or counting of inventory held by the entity on a regular basis. The main purpose of the continuous stock taking is to ensure that sufficient raw materials and finished goods are available for production and sales respectively, eliminating the possibility of stock outs. Continuous stock taking is essential for goods of high value (e.g. gems and jewelry) and goods with high turnover (e.g. fast moving consumer goods).

Apart from eliminating stock out situations, continuous stock taking assists identification of losses or wastage and also helps budgeting and forecasting for stock levels. This exercise makes it convenient for the company to identify the reorder level for stocks (inventory level at which a company would place a new order for a stock of raw materials for production) and the reorder quantity (number of units that should be included in the new order). However, conducting continuous stock taking especially in companies that hold a significant amount of inventory is very time consuming and costly. For this reason, a number of companies refrain from this method and inspect stock on a periodic basis.

Figure 01: Continuous stock taking is done on a regular basis

What is the difference between Perpetual Inventory System and Continuous Stock Taking?

Summary – Perpetual Inventory System vs Continuous Stock Taking

The difference between perpetual inventory system and continuous stock taking is that perpetual inventory system values stock on a regular basis while continuous stock taking is conducted in order to check stock availability. Both these methods are costly and time-consuming to exercise; however, they grant higher control over the stock levels. Accurate value and quantity of inventory are essential for the preparation of year-end financial statements. Thus, it is important to spend sufficient resources in stock valuation and inspection.

Reference:
1.”Perpetual Inventory.” Investopedia. N.p., 13 July 2015. Web. 22 May 2017. <http://www.investopedia.com/terms/p/perpetualinventory.asp>.
2.”Last-in, first-out (LIFO) method in a perpetual inventory system.” Accounting For Management. N.p., 10 Jan. 2017. Web. 22 May 2017. <http://www.accountingformanagement.org/last-in-first-out-lifo-method-in-a-perpetual-inventory-system/>.
3. Fazal, Hasaan. “What is Continuous stocktaking?” PakAccountants.com. N.p., 16 Mar. 2014. Web. 21 May 2017. <http://pakaccountants.com/what-is-continuous-stocktaking/>.

Image Courtesy:
1. “U.S. Navy Ship’s Serviceman 2nd Class Jeffery Meade conducts an inventory check on a shipment aboard the guided missile cruiser USS Monterey (CG 61) as the ship is moored in Souda Bay, Greece” By MC2 Billy Ho – (Public Domain) via Commons Wikimedia

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