Login

Perpetual Inventory System: Definition, Advantages & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Predetermined Overhead Rate: Formula & Example

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 Perpetual Inventory…
  • 0:41 Advantages of the…
  • 1:35 Example of a Perpetual…
  • 3:41 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Kimberly Winston
Businesses keep track of inventory through inventory systems. This lesson will focus on one type of system - perpetual inventory system. It will define perpetual inventory system, examine its advantages and give an example.

Perpetual Inventory System Defined

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. The widespread use of computers after the 1970s increased this systems popularity because businesses were able to more easily keep track of inventory as it sold. Barcodes, radiofrequency identification scanners (known as RFID), and point of sale systems (also known as POS) provided support for this system by quickly inputting inventory information as customers purchase items.

Advantages of the Perpetual Inventory System

Perpetual inventory systems are common in many modern businesses. They are most often found in large businesses, businesses with multiple locations, or businesses that carry expensive products, such as a jeweler or electronics store. While errors in inventory occur due to loss, breakage, theft, improper inventory tracking, or scanning errors, there are many advantages to using a perpetual inventory system:

  • Prevents stock outs; a stock out means that a product is out of stock
  • Gives business owners a more accurate understanding of customer preferences
  • Allows business owners to centralize the inventory management system for multiple locations
  • Provides greater accuracy due to each inventory item being recorded on a separate ledger
  • Gives valuable information to business owners, such as discounts, purchases, and returns
  • Reduces physical inventory counts

Example of a Perpetual Inventory System

Omar works for ABC Pool Equipment Company. It is his job to manage the inventory. There is an inventory of over 5000 parts. Each part cost from $50 to $500. Omar knows that with such a large, expensive inventory he needs to be able to control inventory and know exactly what he has on hand for each part. He has decided that implementing a perpetual inventory system is the best solution.

Using barcodes on each inventory item and RFID scanners, workers are able to assist Omar in keeping track of each part that is received, moved, or sold. On March 15, 2014, Omar saw that there were only 49 above ground pool pumps in inventory. He placed an order for 50 more pumps. On April 1, 2014, 50 above ground pool pumps costing $100 each were received and scanned into inventory.

The pumps were placed on row D in section 6 on shelf B in bin 4 or D-6-B-4 with the previous inventory of 49 pumps. Every time a pump is sold, a work order is produced that sends workers to D-6-B-4 to retrieve the part. Workers scan the part and the barcode of the location of the part, enter the number the work order requires, and save the record. The part is then updated in the computer system.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support