Explain the differences between a perpetual inventory system and a periodic inventory system.

Explanation should include the following facts:

• In a perpetual system, there is a continuous record of merchandise inventory on hand and the cost of goods sold.
• In a periodic system, items of merchandise inventory on hand are counted, weighed, or measured periodically.
• In a perpetual system, the Merchandise Inventory Account and Cost of Goods Sold Account are actual accounts that show the movement of inventory and are updated with every transaction.
• In a periodic system, there is less inventory tracking and control because the inventory record is not updated constantly and costs are assigned to the ending inventory, directly affecting the company’s cost of goods sold and gross profit.

Students should also explore the effects of a just-in-time production schedule in which suppliers deliver materials and parts at the moment they are needed. Just-in-time eliminates costly inventories.