What is FIFO in inventory management systems
What is the difference between a periodic and perpetual inventory management system and what is right for your company? Most small businesses still use periodic inventory management, although ongoing inventory management is becoming increasingly popular due to the development of more sophisticated computer scanning of inventory.
More and more companies are using these scanners at the point of sale.
In accordance with generally accepted accounting principles (GAAP), companies can use either a periodic or a perpetual inventory system. Below is the difference between the two systems and what works best for your business.
What is a periodic inventory system?
Periodic inventory management enables a company to determine the opening and closing inventory within a posting period, but not daily inventory. Inventory is tracked by an inventory count. With this system, all purchases are recorded in a purchasing account. When the inventory is completed, the balance in the purchasing account is moved to the inventory account, which in turn is adjusted to the cost of the closing inventory.
The calculation of the manufacturing costs of the periodic storage system is as follows:
Start of inventory + purchases = cost of goods for sale
Cost of Goods for Sale - Closing Inventory = Cost of Goods Sold
The cost of ending inventory can be calculated using the inventory accounting methods LIFO or FIFO, or other less common methods. The inventory starts with the inventory of the previous period.
What is an Infinite Inventory System?
An ongoing inventory tracking system records inventory balances after each transaction through point-of-sale inventory systems.
There is no need to close the warehouse for an inventory as inventory management systems enable continuous inventory. Eternal inventory systems keep a current account of the company inventory.
Perpetual inventory systems contain more records than periodic inventory systems. Each inventory property is managed in a separate ledger. These inventory books contain information about the cost of goods sold, purchases, and inventory levels. Perpetual inventory management systems allow a high level of control over the company's inventory by management.
Eternal inventory systems tell the business owner what is being sold, where it was sold, when it was sold, and at what price it was sold. This allows companies to use more than one location with a central inventory management system.
Even with a permanent inventory management system, the company must shut down at least once a year to perform a regular or manual inventory count. The scanned data should tell the business owner exactly what inventory should be on hand. The main benefit of having a regular inventory count is to see how much inventory has been lost, stolen, or damaged.
Which is Better - Perpetual or Periodic Inventory Management?
If your business is small or you don't have extra cash to invest, regular inventory management may be a better choice for you as you can get by with just a cash register and basic bookkeeping. If you sell services instead of products, you might not need an inventory control system unless you own a restaurant or are in the hospitality industry.
As your business grows, you can switch to a permanent inventory management system as you can always see the balance in your inventory account. Large companies typically have permanent inventory systems instead of periodic inventory systems because the rest of their finance and accounting systems are computerized.
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