Wholesale and retail companies purchase goods that are in finished form. These companies are intermediaries in the process of moving goods from the manufacturer to the end customer.
The cost of merchandise inventory is equal to the wholesaler's/retailer's purchase price (i.e., the amount it paid to the manufacturer) plus any packaging, handling, and transportation costs.
Manufacturing companies produce goods that are sold to wholesalers, retailers, and end consumers. These companies have three types of inventory:
raw materials (e.g., the glass screen that goes into Apple's iPhone),
work-in-process (cost partially completed products), and
finished goods (cost of goods that have completed the manufacturing process).
In a perpetual inventory system the inventory account is continually adjusted for each change in inventory, whether it's caused by a purchase, a sale, or a return of inventory. In addition, the cost of goods sold (COGS) account is adjusted each time goods areĀ sold or are returned by a customer. It continuously tracks both quantities and costs.
Nearly all major companies use a perpetual inventory system.
A company using a periodic inventory system does not maintain a continual record of inventory quantity or cost. Instead, it performs a simple reconciliation to determine the value and quantity of the inventory it sold during the period.
Both systems get you to the same cost of goods sold value.
But, a perpetual system provides the company with more timely information. As a result, the company can make better decisions (e.g., properly pricing its products).
The downside of a perpetual system is that it is costlier than a periodic system.