Perpetual Inventory System

A perpetual inventory system, as the name suggests, gives a continuous record of the amount of inventory on hand. A perpetual inventory system adds up all the merchandise purchases in the Inventory account, and removes them from this account when an item is sold, and transfers it to Cost of Goods sold. Therefore, a merchandise piece sits as Inventory on the balance sheet of Costco when it is not sold. However as soon as it is sold, it is moved from the Inventory account to Cost of goods sold, an expense item on the Income statement. The advantage of using a perpetual inventory system is that at any given point in time, we can see the amount of merchandise inventory on hand without doing any calculations.

The perpetual inventory system has become popular due to advancements in computer technology that continually post inventory transactions and keep an updated account. Doing this on paper or by hand using human accountants is impossible, especially for a large company such as Costco Wholesale. Perpetual inventory systems therefore provide more timely information to investors, are currently widely used across all businesses and will be the focus of our tutorials here.

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