If you are running a manufacturing business, inventories are what you always need to handle. Doing accounting tasks about inventories are challenging, especially if you are unfamiliar with accounting. Hence, if you are not sure how you should do it and you do not want to hire an in-house accountant in your company, outsourcing your accounting tasks to an accounting firm in Johor Bahru can be a right choice for you.
Now, let’s have a look at two types of inventory systems, the periodic inventory system and perpetual inventory system.
Periodic Inventory System
The company that uses the periodic inventory system will only update the balance for its ending inventory in its general ledger when the employees have performed a physical inventory count (Also see Procedures of Field Audit for Inventory Audits). As the employees will need a lot of time to complete physical inventory counts, most of the companies will at most do it once a year or once a quarter. Meanwhile, in the company’s accounting system, the inventory account will still show the cost of inventories as of what the company has recorded in its previous physical inventory count.
By using the periodic inventory system, the accountant needs to record all the purchases the company has made between the physical inventory counts in the purchase account (Also see How Do Accountants Record Transactions?). After completing the physical inventory counts, the accountant should move the purchase account balance to the inventory account before adjusting the balance so that the ending inventory cost and the balance can match each other.
If a company uses this system, to calculate the cost of goods sold, it should add up the beginning inventory and the purchases to find out the cost of goods which are available for sale. Then, subtract ending inventory from the cost of goods which are available for sale. The resulting amount is the company’s cost of goods sold.
Perpetual Inventory System
The company that uses the perpetual inventory system will update its inventory records continuously to deal with the increase and decrease in inventories. This can happen as a result of some activities such as the company has moved some items from one place to another, received some inventories or has sold some goods from its stock, disposed of some items (Also see Disposal of Fixed Asset in a Company) and the staff has picked some inventories for the manufacturing process.
Hence, the advantage of using the perpetual inventory system is that the company will be able to obtain information about updated inventory balances, and this system does not need the company to conduct extensive physical inventory counts. However, there is a possibility where the number of inventories calculated using this system will diverge from the inventories that the company has on-hand as a result of theft or unrecorded transactions. Thus, to solve this problem, business owners should compare the number of inventories that the company has and the balances that are recorded on its books of accounts (Also see Books of Accounts – Journal). Then, they should adjust the company’s book balance if required.
Undoubtedly, most businesses would prefer using the perpetual inventory system to trace their inventories. This is because they can always get quite accurate results if they manage the system properly. The system has the highest efficiency when people use it with bin locations as well as a computerised inventory system.