In Perpetual Inventory System, we regularly update the value of inventory when inventory are sold, while in periodic inventory system, we don’t adjust the value of inventory when inventory are sold. Instead, we adjust the value at the end of operating cycle or accounting period of the business of Entrepreneur.
Perpetual Inventory System is based on Computerized Accounting System which is integrated in larger-scale businesses. But, Periodic Inventory System is mostly adopted by small-scale businesses.
Perpetual Inventory System requires expensive tools to operate within the larger companies because this system demands constant updates of inventory through automatic computerized system in a la larger company whereas, Periodic Inventory System, is less expensive and suitable for small business entrepreneur or firms. These businesses record the value of Inventory, periodically through manually accounting system.
Difference Between Two Systems From the Points of View of Inventory Journal Entries
In Perpetual Inventory System, when merchandises are purchased, its costs are debited to Inventory Account. When merchandises are sold, a journal entry is recorded in Inventory Subsidiary Ledger to update the value of cost of sales and inventory. Whereas in case of Periodic Inventory System, when merchandises are purchased, its costs are debited to Purchases Account. When Merchandises are sold, a Journal entry to record the sales revenue is made but no entry of adjusting the value of cost of sales and inventory is made immediately. These adjusting values are made at the end of accounting period or accounting cycle by Calculating Cost of Goods Sold under Periodic Inventory System.