Under the periodic inventory system, the opening stock is accounted as an asset and purchases are accounted as expense. The closing stock is accounted as an asset and is determined based on physical count. Basically, the periodic inventory system is designed to maintain updated figures in both the inventory and cost of goods sold accounts. Separate subsidiary ledger accounts show the balance for each type of inventory so that the company can manage the size and types of merchandise (Littlehale, 2010). Under the perpetual inventory system, however, stocks are accounted as assets and any additional transactions are added or reduced from the asset account. This system is cheaper because no attempt is made to monitor inventory balances until financial statements are to be prepared.
Berwick Traders Ltd might consider changing from a periodic inventory system to a perpetual system because the perpetual inventory system establishes better control over inventory. Under the perpetual inventory system, inventory account is dynamic as it updates as soon as receipts and payments are made. Frequent updates will enable Berwick Traders Ltd to determine how much inventory they have on hand at any given moment, thereby making it easier to know when to order more. Furthermore, it reduces manual effort of using physical count to maintain updated balances.
Though perpetual inventory system is slightly costly than the periodic inventory system, it will improve the accuracy of Berwick Traders Ltd’s financial statements. Specifically, it ensures very accurate record keeping as to the cost of goods sold over a given period.
Additionally, under the perpetual inventory system, Berwick Traders Ltd will be able to track its inventory on an item-by-item basis, thereby avoiding assumptions to be made as to which particular items of inventory were sold.
Considering all the advantages the