Usually, knowing the net stock position and cost of stock issued during the year is crucial in order to calculate the stock consumption and to ascertain the net profit of a trading or manufacturing concern. There are several methods to calculate the value/cost of the stock issued and stock remaining in the hand. Perpetual and periodic stock taking system are two most popular approaches to determine the value of stock movement and stock lying in the warehouse. Let’s explore more about these systems.
A perpetual system depends on the accounting system being sufficiently sophisticated to be able to record the cost of sales as each item is sold. It allows the necessary transfer from stock account to cost of goods sold the account to be made at the time the sale is made. Consequently, the balance on the stock account at any time represents the actual stock at that time.
Although the use of a perpetual system has many advantages it can be expensive to operate. However, where stock records are computerised it is both cheaper and more convenient to operate such a system. It is therefore being used by an increasing number of firms.
Nevertheless, it remains the case that some businesses, especially small firms, still use a periodic system. Here, no attempt is made to determine the cost of goods sold each time a sale is made. Instead, at intervals when the management wants or need to produce financial statements, the stock is physically counted, cost prices are applied and a total stock value calculated. An entry is then made in the books of account debiting the cost of goods sold and crediting stock with the cost of goods sold for the whole period.
There is no right or wrong method of stock taking, it varies according to nature and type of business. One method which is suitable to one business may not be useful for another. Hope this post helped you.