Question

Identify and describe the pros and cons of the different accounting inventory systems. Think of a business you want to run once you graduate, maybe a grocery store, a restaurant, a car dealership, and so on. Make sure this is a business with merchandise inventories. Identify the types of inventory you would have, and what accounting system would you use, why or why not?

Answer 1

There are two types of inventory systems, the first one is the perpetual inventory system and the second one is periodic inventory system.

1) Perpetual Inventory System

A perpetual inventory system, or continuous inventory system, is an inventory control system that allows businesses to keep a real-time account of inventory on hand. This system keeps track of inventory balances continuously, with updates made whenever a product is received or sold. In this system each and every movement of inventory is recorded in the same time the inventory moves.

a) Pros of Perpetual inventory system

1) Real time updation of stock

2) Prevents stock outs – it means that a product is out of stock

3) Allows business owners to centralize the inventory management system for multiple locations

4) Provides greater accuracy due to each inventory item being recorded on a separate ledger

5) Reduces physical inventory counts

6) Count of stock readily available, it helps in quicker Financial statement preparation

b) Cons of Perpetual Inventory System

1) Acquisition and updation of this technology is expensive. Training to employees on this technique adds to cost.

2) Breakage, theft and loss of inventory is not come to notice of management unless physical inventory count is carried out.

2) Periodic Inventory System

A periodic inventory system, where the inventory account is updated at the end of an accounting period rather than after every sale and purchase. In this method the each and every movement of inventory is not recording in the books. The inventory value is determined by conducting a physical inventory of goods/products on a scheduled basis.

a) Pros of periodic inventory system

1) Cost of the system is low

2) No permanent employee is required for physical counting of inventory under this system, hence it is less expensive.

3) It is applicable for all business organizations large or small dealing with specific or a variety of goods.

4) Since stock taking is done at the end of a period under this system, hence it is not affecting the normal activities of the business.

5) Since the stock-taking of inventory is done on a particular schedule the quantity of stock of merchandise is reliable.

b) Cons of Periodic Inventory System

1) The cost of the human power is high.

2) Real-time data of the inventory is not unavailable.

3) On the days of physical stock taking the normal business operation is needs to be stopped.

4) Under this system, the stock control device is very weak.

5) Under this system chance of fraud and forgery lies, because here continuous control over merchandise is absent.

If I will run a business with the merchandise inventory, I can choose the perpetual inventory system. Under this system we have more control over the inventory available in the business. Most import of following the perpetual inventory system we can assess the customer taste and to maintain such items in the stock.