Whoever came up with perpetual inventory should get a medal.
It’s inventory management that’s accurate, up-to-date, and almost no work at all. It’s literally an improvement in every way over what it improves upon: manual inventory.
Here’s what perpetual inventory is and why virtually any business that wants an advantage needs to use it.
Perpetual Inventory Method: What Is Perpetual Inventory?
Perpetual Inventory Definition
The perpetual inventory method is a way of accounting for inventory that records the purchase and sale of products. And it does it all via inventory management software. It provides a real-time view of inventory levels at any given moment in time.
When products are acquired, they’re immediately entered into a database. When products are sold, they’re immediately removed from a database. The database will always accurately reflect the amount of product on hand.
Using perpetual inventory, businesses don’t have to worry about “taking inventory,” because it’s done automatically and constantly.
BinWise Pro is a great example of this in practice. Bars and restaurants across the country are able to have accurate, real-time inventory levels by doing nothing more than business as usual. Using bar inventory software like this removes an entire operational responsibility (taking inventory) automatically.
We’ll look deeper into the benefits of perpetual bar inventory software like BinWise Pro in a bit.
Perpetual vs Periodic Inventory
To truly understand the value of perpetual inventory, we must understand what it improved upon. And that’s periodic inventory.
Perpetual Inventory System vs Periodic Inventory System
The perpetual and periodic inventory system are two sides of the same coin. One side is much, much better than the other, though.
Periodic inventory is how inventory has been accounted for historically. Here’s how it works:
- Step 1: Manually count and record inventory. It doesn’t necessarily have to be all your inventory at once, you can use cycle counts. Nevertheless, you’ll have to manually account for inventory. This is your starting inventory. Here’s how to do physical counts of inventory if you’re not familiar with the process. We’ve also got a free liquor inventory sheet which is useful. It can help with beer keg tracking and more.
- Step 2: Wait a while and repeat step 1. You may wait a week, a month, or a quarter depending on your inventory turnover ratio. Nevertheless, step 2 is manually counting your inventory again. This is your ending inventory.
- Step 3: Compare the two inventory counts. Doing so gives you current inventory levels, units sold, COGS, average inventory, and a bunch of other useful inventory KPIs.
- Step 4: Take another inventory count in a week, month, or quarter—whatever you’ve decided. This is your new ending inventory. Compare this against the count from step 2, which becomes your new starting inventory.
Rinse and repeat this process at whatever interval suits your business or the product you’re tracking. That’s the gist of the periodic inventory method.
It requires manual labor and consistency. Exponentially so if your business carries thousands of products.
Difference Between Perpetual and Periodic Inventory
Any company using periodic inventory means that inventory metrics are relatively inaccurate. Relative to using a perpetual inventory system, that is.
That’s because businesses with lots of products take inventory rarely. Because it’s a royal pain in the neck. And that means their inventory numbers are usually approximate, since they only get calculations a few times a year.
While it may seem periodic inventory is pointless, there are some benefits. One, you don’t have to purchase inventory management software. Will the time you spend manually taking inventory counteract any money-saving benefit?
Probably. Unless, of course, you have a small inventory.
Car dealers are a great example of this. They’re a business model that can arguably benefit from periodic inventory. It may not be worth implementing software when there are so few inventory items and purchases and sales are few and far between.
Here’s a handy chart that sums it all up:
What Is Perpetual Inventory System?
In most cases, it makes sense to use a perpetual inventory system. It automates almost everything and provides accurate data. Who wouldn’t want that?
Perpetual Inventory System Definition
A perpetual inventory system is an inventory management system that keeps track of inventory in real-time. It works through integration with a point-of-sale system.
Here’s how it works.
Perpetual Inventory System Example
We’ll use BinWise as an example, because we’re intimately familiar with it. It also integrates with over 50 POS systems.
Consider a small hypothetical pub, the Claw & Cross. If they’re using BinWise Pro, the following happens:
- All existing inventory is automatically into an inventory database
- All received inventory is automatically added to the pub’s existing inventory database
- All inventory sold is automatically removed from the pub’s existing inventory database (thanks, POS integration!)
- Monthly manual inventory counts are compared against perpetual inventory numbers to determine variance
- Current and historic inventory data is available at the click of a button
That’s it. The act of “taking inventory” pretty much disappears when you use a perpetual inventory system.
And you know what appears instead?
Reams of useful inventory data. You save time and get the ability to start making decisions that increase bar profitability. That’s what we call a win-win in the biz.
Perpetual Inventory System Accounting
Now let’s look at the two most common methods of perpetual inventory accounting.
LIFO Perpetual Inventory Method
The LIFO perpetual inventory method is an inventory costing method. That is, it’s a method of assigning value to inventory, not just tallying it up.
With LIFO costing, the accounting assumes that the newest inventory has been sold first. That means the cost of goods sold (COGS) and available for sale are based on the most recent valuation of a product.
Perpetual LIFO is the act of consistently—and in real-time—costing inventory using the LIFO method of evaluation. Every time an item is sold, it’s costed at whatever the most recent wholesale purchase price of that item was.
Doesn’t matter if your company acquired the inventory 3 years ago. You cost it as if it was acquired at the current wholesale market price. And this costing is done every time a transaction is made, in real-time. Perpetually.
That’s opposed to FIFO perpetual inventory.
FIFO Perpetual Inventory
With FIFO perpetual inventory, the accounting assumes that the oldest inventory has been sold first. That means the cost of goods sold and available for sale are based on the oldest valuation of a product.
Perpetual FIFO, then, is the act of consistently—and in real-time—costing inventory using the FIFO method of evaluation. Every time an item is sold, it’s costed at whatever the oldest wholesale purchase price of that item was.
Perpetual Inventory System Journal Entry
Perpetual inventory is an ongoing process that occurs in real-time. That means there’s a new perpetual inventory system journal entry with each new transaction. Be that a credit or debit.
Purchases are debited to the inventory account, and sales are credited. And the debit applies to COGS.
This all happens automatically. The beauty of a perpetual inventory system is that any perpetual inventory system journal entry is automated.
Using BinWise Pro for restaurant or bar inventory management is a great example. There’s no need to worry about perpetual inventory system journal entry templates or worksheets.
Just start using BinWise Pro and every purchase and sale made is automatically accounted for. And recorded. That means historical data is available all the time. There's even a bar inventory app so you can check levels from home or on vacation.
And data-driven decision making is how businesses get ahead today. It will also help you avoid pesky issues like excess inventory.