6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems

Two Inventory Systems

There are two main systems for tracking inventory:

1. Perpetual Inventory System
2. Periodic Inventory System

Perpetual Inventory System

Definition: Inventory records are updated continuously—every time inventory is purchased or sold, the inventory account is updated immediately.

How it Works:

• Inventory account updated with each purchase
• Inventory account updated with each sale (reduced by cost)
• Cost of goods sold recorded at time of sale
• Inventory balance always shows current quantity and value

Advantages:

• Always know current inventory levels
• Immediate cost of goods sold calculation
• Better inventory control
• Easier to detect theft or errors
• Required for most modern businesses

Disadvantages:

• More complex to maintain
• Requires detailed record-keeping
• More expensive (requires inventory management system)
• More time-consuming

Who Uses It:

• Most modern businesses
• Businesses with computerized systems
• Large retailers
• Businesses needing real-time inventory data
• Required for many businesses in Luxembourg

Periodic Inventory System

Definition: Inventory records are updated only at the end of the period. During the period, purchases are recorded, but inventory and cost of goods sold are not updated until period end.

How it Works:

• Purchases recorded in Purchases account (not Inventory)
• Sales recorded, but cost not calculated at sale
• At period end: Physical count of inventory
• Cost of goods sold calculated: Beginning Inventory + Purchases - Ending Inventory

Advantages:

• Simpler to maintain
• Less expensive
• Suitable for small businesses
• Less detailed record-keeping needed

Disadvantages:

• Don't know inventory levels during period
• Cost of goods sold calculated only at period end
• Less inventory control
• Harder to detect theft or errors
• Requires physical inventory count

Who Uses It:

• Very small businesses
• Businesses with simple operations
• Businesses without inventory management systems
• Less common in modern business

Comparison Table

Feature	Perpetual	Periodic
Inventory Updated	Continuously	At period end
Cost of Goods Sold	Recorded at sale	Calculated at period end
Inventory Balance	Always current	Known only at period end
Physical Count	For verification	Required for calculation
Complexity	Higher	Lower
Cost	Higher	Lower
Control	Better	Less
Modern Usage	Common	Less common

Luxembourg Requirements

PCN Requirements:

• Both systems are acceptable under PCN
• Must use consistent method
• Must properly classify inventory (Class 3)
• Must value inventory according to standards

Practical Considerations:

• Most Luxembourg businesses use perpetual system
• Required for VAT compliance (need to track inventory for VAT)
• Better for businesses with multiple VAT rates
• Recommended for all but smallest businesses

Which System to Use?

Use Perpetual If:

• You have computerized accounting system
• You need real-time inventory data
• You have significant inventory value
• You need better inventory control
• You have multiple product types/VAT rates

Use Periodic If:

• Very small business
• Simple operations
• Manual accounting system
• Low inventory value
• Single product type

Luxembourg Recommendation: Use perpetual system for most businesses, especially those with:

• Multiple VAT rates
• Significant inventory
• Need for inventory control
• Computerized systems

Luxembourg Compliance Note

While both systems are acceptable, Luxembourg businesses should consider:

• VAT compliance requires tracking inventory
• Multiple VAT rates make perpetual system advantageous
• PCN requires consistent method
• Must be able to support inventory valuations
• Physical counts still required for verification (even with perpetual)

Think It Through

A Luxembourg retail store sells clothing with 17% VAT and children's clothing with 3% VAT. Which inventory system would be better for this business? Why?

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