Discuss the advantages and disadvantages of accounting for inventory under the perpetual inventory system
The major difference between the two methods of recording for inventory accounting systems (perpetual and periodic) is the extent to which stock movements are monitored. The physical system of recording for inventory does not keep records of the movements of stock. The only information in the ledger concerning merchandise is the recording in the stock account of the total inventory determined by a physical stock-take at the end of each accounting period.
However, under the perpetual inventory method, individual items of merchandise are recorded on stock cards and a stock control account is kept continuously up to date by recording movements of all inventories into and out of the business. Perpetual inventory involves keeping records of all stock movements throughout the accounting period. (It is also known as the continuous inventory method.) This method updates the balance of stock on hand on a continuous basis throughout the period allowing a greater control over stock. Every time stock moves in or out of the business, the inventory balance is updated. When stock is purchased, the balance is increased. When sales are made, the balance will be decreased. Sales returns have the effect of increasing stock on hand and purchase returns decrease the stock on hand. Withdrawals of inventory by the proprietor must also be accounted for, as this will decrease the balance of stock. As inventory is always recorded at cost price, there is a need to have access to information regarding the cost price of stock throughout the accounting period (ACS Distance Education , 2013).
Some of the advantages are (Harrison, Horngren, & Thomas, 2013, p. 342): * Used for all types of goods * Keeps a running record of all goods bought, sold and on hand * Inventory