Question

What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Short answer

Perpetual and periodic inventory are the two inventory systems for controlling inventory. The balance under these two inventories would often differ.

Step-by-step solution

Difference between the perpetual inventory and physical inventory

Basis of difference	Perpetual Inventory	Periodic Inventory
1. Definition	A perpetual inventory is a process of keeping track of inventories continuously.	Periodic inventory keeps checking on inventory after a period like annually.
2. Accounting	Under perpetual inventory, the inventory account is maintained for all purchases and issues.	Under periodic inventory, only the purchase account is maintained.
3. COGS	The cost of goods sold is recorded for each sale.	The cost of goods sold is recorded only at the end of the period.
4. Ending inventory	Ending inventory is the balance of the inventory account.	Ending inventory is determined by physical inspection.

Difference in amount under two inventory systems

Under perpetual inventory, inventory is updated after every inventory or inventory-related transaction. But in reality, inventory may be lost due to spoilage, theft, or breakage.

On physical inspection, such loss is identified. So there remains a difference between the perpetual and physical inventory, which is adjusted through the “inventory over and short” account.