by the SERDEF Media Bureau
(first published in the Philippine Online Chronicles, December 20, 2014)
The end of the year is usually the time for companies to conduct a physical inventory of their products. Whether it is to determine an accurate on-hand value of available merchandise or a way of complying with tax and/or accounting rules, the first step is to decide what type of inventory is suitable for your company.
A number of factors should be considered in choosing which type of inventory is suited for your business. These factors, together with an understanding of the types of inventory will help you choose which one. Before we get into the factors, we should first differentiate the two types of inventory.
Perpetual inventory system
This kind of inventory system where store balances of inventory are recoded after every transaction. This type of inventory keeps a running account of all the company’s sales and its available stocks. Since this type of system does the record-keeping continuously and in real time, there is no need for the store to close down for inventory stacking.
A perpetual inventory system gives management a high degree of control of the company’s inventory and being detailed (each inventory is kept on a separate ledger), this type of system allows for businesses to have more than one location with one centralized inventory management system.
This type of system is usually preferred by companies who scan the inventory items they sell and those who use point-of sale inventory systems. This is usually preferred by large companies since most of these companies have their financial and accounting systems computerized.
Periodic inventory system
This type of inventory does not track the goods sold until the end of an accounting period. This is done by conducting a physical inventory every so often and comparing these inventories with the data taken from the previous inventory.
Although not as specific as a perpetual inventory, this type of inventory system allows the business to know its beginning and ending inventory but not its daily inventory. This type of system does not determine if products were sold, stolen, lost or spoiled.
But unlike the Perpetual Inventory System, the Periodic Inventory System does not require sensitive equipment and programs. It is for this reason that this type of inventory system is often the choice of startup businesses since all you need to conduct this type of inventory is your cash register and a simple accounting procedure.
But as your business grows, it may be advisable to switch to a perpetual inventory system since this type of inventory allows you to know your inventory account at any point in time and you don’t need to wait for the scheduled accounting period.