What is Perpetual Inventory System?

The perpetual inventory system is intended as an aid to material control. It is a system of stock control followed by stores department. The system follows a method of recording stores by which information about each receipt, issue and current balance of stock is always available.

The Institute of Cost and Management Accountants of England and Wales, defines perpetual inventory as "A system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balances."

According to Weldon, "Perpetual inventory system is a method of recordings stores balances after every receipt and issue, to facilitate regular checking and obviate closing down of work for stock-taking."

Thus, it is a system of ascertaining current balance after recording every receipt and issue of materials through stock records. An important point which should be kept in mind is that the perpetual inventory is usually checked by a programme of continuous stock-taking. Perpetual inventory means the system of it cords whereas continuous stock-taking means the physical checking of those records with actual stocks. '

Perpetual inventory system comprises of:

(a) Comparison of Bin Cards (quantitative perpetual inventory) and Stores Ledger Accounts (quantitative-cum-valued perpetual inventory),

(b) Continuous Stock-Taking (Physical perpetual inventory)

(a) Comparison of Bind Cards and Stores Ledger Account

Bin card is maintained by the store-keeper and stores ledger account is maintained by stores accountant. Each item of stores is recorded at these places simultaneously. Normally the balances shown by the two records tally. However, th6re may arise some differences between these two records due to the following reasons:

(i) Omission of an item of store in bin card or stores ledger account.

(ii) Wrong posting of an item of store either in bin card or in stores ledger account.

(iii) Arithmetical error in working out their balances. Therefore, the balances of the two records should be reconciled at frequent intervals and correct balances should be drawn.

(b) Physical Stock Verification

The perpetual inventory system is not complete without a systematic procedure for physical verification of stores. The correctness of balances as shown in the bin card or stores ledger account should be verified by means of physical stock verification. Physical stock verification may be conducted in the following two ways:

(i) Periodic stock verification

(ii) Continuous stock verification

(i) Periodic stock verification: It refers to a system where physical stock verification is normally done periodically, i.e., once or twice in a year. Under this method, value of stock is determined by physical counting of the stock on a particular date, usually at the end of the year.

It is a simple and economical method of stock-taking and is adopted in small concerns. This type of verification is good only for the items which do not find place in the perpetual inventory records, e.g., works-in-progress, components and consumable stores at site etc. But there are many limitations of this method. Stores may' be closed down for a few days to facilitate stock-taking. There is possibility of fraud] discrepancy, etc.

(ii) Continuous stock verification: This system comprises of counting and verifying i number of items at random daily throughout the year so that all items of stores are verified several times during the year. Notice of the particular stock to be verified each clay is given to the store-keeper only on the date of actual verification.

As there is an element of surprise check in this system of stock-taking, effective control over the items of stores can be exercised. The system does not necessitate the closing down of the stores to facilitate stock-taking. There is also less possibility of fraud and discrepancy, but the method is expensive and is adopted by big concerns only.

The actual stock of material should not differ from the recorded stock under normal circumstances. But-sometimes differences arise due to the following reasons:

(i) Breakage and wastage of materials due to improper handling.

(ii) Shrinkage and evaporation.

(iii) Losses due to accident, fire, etc.

(iv) Losses arising out of breaking up bulk materials.

(v) Losses due to theft.

(vi) Misrouting in bin card or stores ledger account.

(vii) Over or short-issue.

Advantages of Perpetual Inventory System

(i) Easy detection of errors - Errors and frauds can be easily detected at an early date. It helps in preventing their occurrence.

(ii) Better control over stores- The system exercises better control over all receipts and issues in such a manner so as to give a complete picture of both quantities and values of stock in hand at all times.

(iii) No interruption of production process- Production process is not interrupted as the physical verification of stock is made on a planned and regular basis.

(iv) Acts as internal check- Under the system, records are made simultaneously in the bin cards and stores ledger accounts which acts as a system of internal check for detection of errors as and when they are committed.

(v) Investment in materials kept under control - The investment in materials is kept at a minimum level as the actual stock is continuously compared with the maximum level and minimum level.

(vi) Early detection of loss of stock- Loss of stock due to shrinkage, evaporation, accident, fire, theft, etc. can be easily detected.

(vii) Accurate and up-to-date accounting records- Due to continuous stockĀ­taking, the store-keeper and stores accountant become more vigilant in their works and they maintain accurate and up-to-date records.

(viii) Easy to prepare interim accounts- It is possible to prepare periodical profit and loss account and balance sheet without physical stock-taking being made.

Availability of correct stock data- Correct stock data is readily available for settlement of insurance claims.

Disadvantages of excessive Stock are avoided - The following disadvantages of excessive stock are avoided:

(a) Loss of interest on capital locked up in stock.

(b) Loss through deterioration.

(c) Risk of obsolescence.

(xi) Employment of specialised staff - Since the work is spread throughout year, whole time specialised staff can be engaged for the purpose.

(xii) Moral check on employees - The system acts as a moral check on the employees working in the stores which increases their efficiency.

Such losses increase the cost of production. These losses may be in the form of wastage scrap, defective and spoilage. The problems of waste, scrap, spoilage or defectives materials must arise in almost all manufacturing industries. There is no uniformity the meaning and accounting treatment of waste, scrap, spoilage and defective However, steps should be taken to minimise the discrepancy so that efficiency can increased and proper material control is ensured.