Inventory Systems

There are two system through which records of quantity and value of inventory- in-hand can be maintained which are as periodic inventory system and perpetual inventory system.

Under the periodic system the stock is verified at the end of the accounting year.This system is quite expensive because it involves stoppage of production activity.It is rarely adopted by the organisation as it has some disadvantages.One of the drawback is that it is based on the assumption that all goods which are not accounted by physical count have been either sold or used.In this way losses due to theft,waste are not properly included in the cost of the goods sold.

Another system is the inventory system in which stock is verified continuously.It means maintenance of such records that will show the receipts,issues and balance of all items in stock.This system facilitates the preparation of profit and loss account for interim periods.Also,correct stock figures are readily available for insurance purposes.Controlling losses will be easier under this system because records are continuously maintained which indicate the goods that must be on hand.Also,the business operations will not be interrupted.This system is costly to maintain especially for those business firms which deals with multitude of items of small value.Hence,this system is essential for planning production.

From the above it is concluded,the basic differences between periodic and perpetual inventory systems are-Periodic inventory system requires a physical count of all the inventory items at the end of an accounting period whereas perpetual inventory system is based on continuous record keeping of various items of inventories.Perpetual system provides a basis for inventory control so that physical stocks can be compared with book records and if there is any discrepancy,it will be investigated.This is not feasible under the periodic system.

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