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Any business that needs to count its all it’s widgets, needs to decide whether you’ll be using a perpetual or periodical (also known as physical) inventory method. If you already know what you want to use, have a look below for more information on how handles each method.
If you’re not sure what method works best for your business, don’t worry! It’s a lot easier than it sounds. This information will help you choose the the best method for your business and give you greater control over managing your stock.
Generally speaking, perpetual inventory is when the inventory system is automatically updated for each sale and purchase, is used in businesses with high-volume sales where physical inventory counts are time-consuming and costly. Physical inventory counts should be cyclic if the business hold large amounts of inventory rather than leaving it to a massive stock count at the end of the financial year.
When using a perpetual inventory, inventory’s monetary value is tracked using the average costing method in products like MYOB AccountRight.
Unlike other valuing methods, such as First in First Out (FIFO), the average costing method values your inventory by calculating its weighted average value, using the formula: Average Cost=Total Value of the item ÷ Total Quantity of items.
Periodical inventory is usually best for suited for businesses that sell low-volume products, such as motor vehicles or artwork, that can easily be tracked by a physical count. Under a periodical (or physical) inventory method, an inventory balance is recorded only after a physical inventory count.
If you are unsure which method is best for your business, talk to Lime Results and your Accountant to help you make the right decision for your business. But no matter which method you choose, we will be able to make your business life easier and more efficient.
The information provided here is of a general nature for Australia and should not be your only source of information.