10 Inventory

Inventory systems: how does a company record changes to inventory?

An inventory system just refers to how, and how often, a company processes changes in inventory. There are two inventory systems: perpetual and periodic.

• Perpetual inventory system: the inventory account increases every time inventory is received and decreases with every sale. The balance in the inventory account is always up to date.
• Periodic system: the inventory account is adjusted periodically. Usually adjustments take place at the end of every month or year, so the balance in the inventory account reflects past inventory levels and is not up to date.

Let’s start with the perpetual inventory system and do a couple problems, then we will work through the periodic system.