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Perpetual Vs Periodic method

These are two contrasting accounting method  commonly used to measure inventory level and compute total gross profit for company Income Statement (Profit & Loss). 
 
Perpetual is the preferred method Inline with current global accounting trend, all ERP grade and internationally renowned accounting software adopt this method. Summarily, Perpetual has the following major benefits:
 
  1. Accurate tracking of inventory and computation of product costing.
  2. Accurate calculation of gross margin because it considers all incidental product costs such as customs duties, inward freights and handling including internally accrued add-on costs such as warranty/service costs, obsolescence, attritions and marketing costs.
  3. Perpetual costing is transactional based, unit costing is recalculated based on stock movement and the actual cost is continuing posted directly to Cost of Goods Sold (COGS) GL code in the accounting module immediately every time a sales invoice is cut.
    This direct capture and posting of COGS to GL when each invoice is cut enabling quick closing of accounting books because Periodic methods requires timely input of month end total stock value. This is inconvenient when a company have huge amount and wide variety of inventory such as hardware trade where month-end physical stock count is time consuming and impractical.
  4. For company with multi branches, Department, Business Unit (BU) or Project as Profit Centre, Perpetual method allows the company to produce a separate P&L statement by the above analysis codes. This is useful for setting and monitoring Profit Center performance.
    Generating separate Profit & Loss Statement for each analysis code is not possible in Periodic method as it requires branch Merchandise Purchase total to compute cost of goods sold (Opening stock +Purchase – Closing Stock). This information is not available when branches draws stock from HQ or a centrally managed warehouse or do inter branch stock transfer.

Periodic Method

This is currently the most used practice by small companies and methods deployed by locally developed accounting software
 
When merchandise purchase is made, it will be recorded in the “Purchase” GL account code. The Inventory and COGS GL account codes are updated at the end of a set period (monthly, quarterly or year-end). To compute total gross profit, COGS is derived on a total basis as shown below:
 
Sales   100,000
     
COGS:    
Add: Opening Stock 120,000  
Add: Purchase 50,000  
Less: Closing Stock 100,000 (70,000)
Gross Profit   30,000
Expenses   (10,000)
Net Profit   20,000
 
Periodic method is better suited to small business due to the cost and expense of acquiring appropriate software and IT equipment and appropriate staff to support Perpetual method. 
 
These are the following trades better suited to Periodic method:
  • Company using manual, non-computerized book keeping
  • Café, Restaurant and serving cooked foods business where tracking of inventory is not possible and impractical.
  • Where Company does not maintain proper inventory records.
  • Low volume inventory and relative ease of using manual tracking.
Company that demands the following is not suitable to use Periodic method:
  • Business with high volume and multiple retail outlets such as Grocery and Pharmacy stores.
  • On time and accurate tracking of inventory movement and product costing.
  • Accurate and on time procurement of merchandise.
  • High value item where monitoring of theft and pilferage is critical.
Current Malaysian GST Laws requires a GST registered person to maintain accurate inventory records including movements and costing. Thus Perpetual system ensures better compliance with GST Laws.
 

Perpetual Method

This method keeps track of inventory balance continuously with update made automatically whenever a product is received or sold, Merchandise  Purchases and Returns are immediately recorded in the “Inventory” GL account code.
 
The COGS account is updated continuously as each sale is made (transactionally base). To use Perpetual, usage of Inventory software that support this method is a must and staff discipline is also important to ensure accurate data input.
 
The technological aspect of Perpetual  has the added advantage to identify inventory errors easily. It shows transactions comprehensively at each individual unit level (locality, movement history, costing, serial number).
 
It is also easier to track and highlight inventory theft and damage issue easily. In Periodic, total value of stock loss items are deducted from month-end lump sum total stock value, hidden in the COGS accounts without getting attention from management. Additionally, embedding stock loss or damage value in the COGS also affects accuracy of gross profit analysis simply because stock loss is not a result of a sales transaction.
 
Perpetual requires an additional accounting entry to be made in the Inventory module for stock loss:
 
Dr. Stock Loss Expense (PnL) 1,000.00
Cr Stock 1,000.00
This stock loss information of 1,000 would appear prominently in the PnL statement.
 
Company with multi outlets would find Perpetual system extremely useful for inventory tracking by outlet and consolidating branch accounting books. The company is able to monitor outlet inventory status and financial performance any time any where via internet.
 
Accounting entries made by Perpetual system
Cost of product 1,000.00
Sold price 1,500.00
 
During purchase/receiving
Dr Stock (B/S) 1,000.00
Cr Supplier 1,000.00
Periodic method Debit to "Purchase Account" instead
 
When a Cash Invoice is issued
DR Cash 1,500.00
Cr Sales 1,500.00
Dr COGS 1,000.00
Cr Stock 1,000.00
Both methods make these similar entries

This additional accounting entry is only generated in Perpetual system and NOT Periodic method. The GL immediate get updated with these financial transactions,GL control total for Sales and Inventory always sync with inventory sub-ledger total.
 
P&L format using Perpetual Method
Sales 100,000
COGS (69,000)
Gross Profit 31,000
Expenses (10,000)
Stock Loss (1,000)
Net Profit 20,000
 
P&L format using Periodic Method
Sales   100,000
COGS:    
+ Opening Stock 120,000  
+ Purchase 50,000  
- Closing Stock 100,000 (70,000)
Gross Profit   30,000
Expenses   (10,000)
Net Profit   20,000
 
Accounting software not developed to support perpetual method is no able to generate separate P&L by branch/outlet/department/BU entity. VeCount software supports both methods, ie: perpetual and periodic.
 
Summary of difference between Periodic and Perpetual Method
 
No cost of good sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold. Impossible
  Periodic Perpetual
Accounts No cost of goods sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold. Continual updates to either the general ledger or inventory journal as inventory-related transactions occur.
Computer Software The simplicity allows for the use of manual record keeping for very small inventories. Impossible to manually maintain the records since there may be thousands of transactions at the unit level in every accounting period
Cost of Goods Sold Calculated in a lump sum at the end of the reporting period by adding total purchases to the beginning inventory and subtracting ending inventory. Continual updates to the cost of goods sold account as each sale is made.
Cycle Counting Impossible Possible
Purchases All purchases are recorded into a purchases asset account. Inventory purchases are recorded in either the raw materials inventory account or merchandise account (depending on the nature of the purchase).
Transaction Tracing Nearly impossible to track through the accounting records. Mush easier, where all transactions are available in detail of the individual unit level.
 
Know more: www.accountingcoach.com , www.smallbusiness.chron.com
 
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