Referring to the earlier topic, which covered what is inventory, the essential question was how to correctly manage inventory, track and calculate cost of inventory sold and cost of inventory which remains at the end of the accounting period for further sales.
For this purpose two inventory management systems can be used:
perpetual inventory system
periodic inventory system
Under Perpetual Inventory System changes in Inventory are being tracked continuously and Inventory account is being updated after each transactions, either purchase, or sale. Perpetual inventory management system allows to know at each moment of time how many items were sold and how many items are left in inventory. This is precise system, which allows to control all inventory movements.
Under Periodic Inventory System, the company does not track each and every inventory transaction. Quantity of inventory on hand and quantity of inventory sold is not known at every period of time, but is rather estimated periodically. At the end of the selected period the company need to calculate quantity of inventory on hand and calculate quantity of inventory sold, taking into account opening inventory and purchased made during the accounting period. It is cheaper to maintain this inventory management system, however it does not provide precise view of the inventory status at the particular time, and also does not allow to control inventory so precisely, as it is possible to do under perpetual inventory system.