A trade or manufacturing company’s net stock position and the cost of stock issued over the year are often required to calculate the stock consumption and determine the company’s net profit.
Methods of Stock Counting or Stock Taking
There are various ways to determine the value/cost of the stock issued and the number of units still in hand. The perpetual and periodic stock-taking systems are the two most often used techniques for determining the value of stock movement and stock remaining in the warehouse, respectively. Let’s look into these systems in further depth.
A perpetual system depends on the accounting system being sufficiently sophisticated to be able to record the cost of sales as each item is sold. It allows the necessary transfer from the stock account to the cost of goods sold in the account to be made at the time the sale is made. Consequently, the balance on the stock account at any time represents the actual stock.
Although using a perpetual system has many advantages, it can be expensive to operate. However, where stock records are computerised, operating such a system is cheaper and more convenient. An increasing number of firms are therefore using it.
Nevertheless, it remains the case that some businesses, especially small firms, still use a periodic system. Here, no attempt is made to determine the cost of goods sold each time a sale is made. Instead, at intervals when the management wants or needs to produce financial statements, the stock is physically counted, cost prices are applied, and a total stock value is calculated. An entry is then made in the books of account, debiting the cost of goods sold and crediting stock with the cost of goods sold for the whole period.
When a business employs a periodic inventory system, neither the cost nor the number of individual inventory goods on hand is tracked. These statistics are not deemed valuable by corporate authorities due to the expense and effort necessary to collect them. However, transactions must continue to occur, and a record of the costs incurred must be preserved. This information is eventually utilised for financial reporting, but it is also used for control reasons more quickly.
Regardless of the accounting method used, businesses seek to minimise overspending on inventory and ancillary costs like transportation and assembly. If the accounting system reveals that a specific expense is increasing at an unsustainable rate, other solutions can be considered before the problem gets severe. Periodic systems are meant to give this information by creating distinct general ledger T-accounts for each expense incurred.
Perpetual inventory systems are intended to keep current figures for both the total inventory and individual products. Separate subsidiary ledger accounts reflect the balance of each sort of inventory, allowing corporate managers to keep track of the merchandise’s size, cost, and composition.
A periodic system is less expensive to operate than a continuous system since no attempt is made to monitor inventory balances (in aggregate or individually) until financial statements are generated. A periodic system does enable a business to manage expenses by tracking specific inventory expenditures as they accrue.
There is no right or wrong method of stock-taking; it varies according to nature and type of business. One method suitable for one business may not be useful for another.