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What is Perpetual Inventory System| Advantages and Disadvantages

Perpetual Inventory System
Perpetual Inventory System

Perpetual Inventory System

Perpetual Inventory System is a system of stock control in which continuous record of receipt and issue of materials is maintained by the stores department. It shows the physical movement of stocks and their current balance.

A perpetual inventory system is usually supported by a programmed of continuous stock-taking. In other words, perpetual inventory system means the system of records, whereas continuous stock-taking means the physical checking of actual stock with the records.

Strictly speaking the perpetual inventory system means maintenance of such records (stock control cards, bin cards and the stores ledger) that will show the receipts, issue and balance of all items in stock at all times.

But to ensure accuracy, the system must be supplemented by a system of continuous stock checking which ensures that physical stock agrees with the book figures. The system is essential for planning production and to see that production is not interrupted due to want of materials and stores.

Also Read – Meaning of Methods of Cost | Basic Methods of Costing

The Chartered Institute of Management Accountants London, defines the perpetual inventory system as. “a system of records maintained by the controlling department, which reflects the physical movements of stocks and their current balance.”

The success of perpetual inventory system depends following:

1. Maintenance and up-to-date writing up of the following records: (a) the store ledger or bit cards.

2. Reconciling the quantity balances shown by store ledger and bin card.

3. Checking the physical balance of a number of item every day sympathetically and by rotation.

4. Explaining promptly the causes of discrepancies between physical balances and book figures.

5. Making corrective, entries where called for after noting the discrepancies.

6. Removing the cause of the discrepancies.

Also Read – Advantages and Disadvantages of Cost Accounting

Advantages of Perpetual Inventory System

The following are advantage of the perpetual inventory system.

1. It helps in avoiding the long and costly work of physical checking stocks at the end of the year.

2. It also avoids dislocation in production which arises in the case of periodic stock-taking at the end of the year.

3. As stock figures are readily available at all times, the Profit and Account and Balance Sheet can be easily prepared at interim periods.

4. The system acts as moral check on the staff of the stores department to work honestly and to keep-up-to-date records.

5. A system of internal check remains in operation all the time.

6. Discrepancies are readily discovered and rectified. This gives an opportunity for preventing a recurrence in future.

7. The system helps in keeping the stocks within the limits decided upon by the management so that excessive working capital is not sunk in the stock.

8. A detailed and reliable check on stores is obtained.

9. It makes available correct figures for claim to be ledged with the Insurance company for loss on account of stock destroyed by fire.

10. As the work of recording and continuous stock-taking is carried out systematically and without undue haste, the figures are more reliable.

11. Planning of production can be done according to the availability of the material in the stores because the management is constantly kept informed of the stores positions.

12. It reveals the existence of surplus, dormant, obsolete and slow moving materials and hence remedial action can be taken.

13. It helps in avoiding the under-stocking and over-stocking of materials and the dangers associated with them.

Disadvantages Perpetual Inventory System

Besides the above of perpetual inventory system, it suffers from the following limitations:

(i) The system is expensive and a small concern cannot afford to implement this system.

(ii) The information about actual stock of a particular item on a particular day may not be available, only figures above are available.

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