Perpetual inventory system is also known as automatic inventory system. According to ICMA, London, it is,
a system of records maintained by the Controlling Department which reflects the physical movements of stock and their current balance.
Wheldon has given an exhaustive definition of it. According to him, it is,
a method of recording stores balances after every receipt and issue, to facilitate regular checking and to obviate closing down for stocktaking.
Thus, the perpetual inventory system means maintenance of records such as stock control cards, bin cards and store ledger. To ensure accuracy, the system must be supplemented by a system of continuous stock checking which ensures that physical stock balance agrees with the book balances. Thus, the basic object of this system is to make available details about the quantity and value of stock at all times. A perpetual inventory is usually checked by a programme of continuous stock taking and the two terms are sometimes loosely considered synonymous. But this is not so.
Perpetual inventory maintains the system of records , whereas continuous stock taking means the physical checking of those records with actual stocks: Thus, the basic purpose of perpetual inventory system is to obtain the uptodate information about the inventories. In order to make the system successful, the following factors should be kept in mind:
(1) Stores ledger, stoles control cards or bin cards are properly maintained.
(2) Quantity balances shown in the stores ledger, stock control cards and bin cards are reconciled.
(3) A number of items systematically and by roution are physically checked every day.
(4) Exploring the cause, of dicrepencies, if any, betwen physical balances and book balances.
(5) Taking remedial action and making corrective entries wherever it is possible to do so and removing the causes of discrepancies. Normally, there should be no difference between the two balances of store cards and bin cards. But in practice differences may arise due to following reasons:
(a) Arithmetical errors in working out balance,
(b) Non-posting of transactions either in bin cards or store ledger, posting in working bin cards or in wrong sheet of the store.
Reconciliation should be done in order to have successful working of the perpetual inventory system.
Closely allied to the perpetual inventory system is the continuous checking of stock. It is otherwise called Periodic inventory system. Under this periodic or continuous stock-taking system, a number of items are counted daily or at frequent intervals and compared with the bin cards and store ledger by the Stores Audit Clerk. Whenever stock is incorrect, an investigation is made and if there is any storage or surplus, it is adjusted in the records to make them correspond to the physical count. A debit note or a credit note, as the case may be, is prepared to adjust the shortage of surplus.