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Inventory Systems

Records pertaining to quantity and value of inventory in hand can be maintained according to any of the following two systems:

(i) Periodic inventory system

In case of this system the quantity and vale of inventory is found out only at the end of accounting period after having a physical verification of the units in hand. The system does not provide the information regarding the quantity and the value of materials in hand on a continuous basis. The cost of materials used is obtained by adding the total value of inventory purchased during the period to the value of inventory at the end of the period. For example, if the value of the inventory in the beginning was $ 10000, purchases during the period were of $ 50000 and the closing inventory $ 15000, the cost of materials used will be taken as $ 45000 (i.e. $ 10000 + $ 50000 - $ 15000). It is thus assumed that materials not in stock have been used. No accounting is done for shortage, losses, theft and wastage.

(ii) Perpetual inventory system

It is also known as automatic inventory system.

According to the chartered institute of management accountants (CIMA), London, it is “a system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balance.” The definition given by Wheldon is more exhaustive and explanatory. According to him, it is “a method of recording stores balances after every receipt and issue, to facilitate regular checking and to obviate closing down for stock taking”. The basic object of this system is to make available details about the quantity and value of stock of each item at all times. The system thus provides a rigid control over stock of materials as physical stock can regularly be verified with the stock records kept in the stores and the cost office.

Perpetual inventory system requires:

(i) Maintenance of both bin cards as well as stores ledger on perpetual inventory system. Bin cards provide quantitative perpetual inventory while stores ledger provides quantitative-cum-value perpetual inventory.

(ii) Adoption of continuous stock taking.

Bin cards and stores ledger have already been explained in the previous pages. The meaning and significance of continuous stock-taking is explained.