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INVENTORY SYSTEM
The chief aims of inventory control are as follows:
- To maintain a balanced inventory.
- To ensure the smooth flow of production.
- To keep the investment in inventory as low as possible.
Accordingly, stock verification is an important aspect to ensure and maintain a balanced inventory.
The following are the two systems of stock verification adopted in different industries:
(l) Periodic Inventory System. (periodic stocktaking)
(2) Perpetual Inventory System. (perpetual stocktaking)
(3) Continuous Stock Verification. (continuous stocktaking)
(1) Periodic Inventory System:
Under this system, quantity and value of materials are checked and verified at the end of the accounting period after having a physical verification of the units in hand.
(2) Perpetual Inventory System:
The Perpetual Inventory System is also known as Automatic Inventory System. This is one of the important methods adopted for verification inventories to know the physical balances.
Perpetual Inventory System as a method of recording stores balances after every receipt and issue to facilitate regular checking and to obviate closing down for stock taking.
Advantages of Perpetual Inventory System
(I) It facilitates rigid control over stock of materials.
(2) It gives up to date details about materials in stock.
(3) Not necessary to stop production for stock taking.
(4) It assists to minimize pilferage and fraudulent practices.
(5) It enables to reconcile the stock records and document for accuracy.
(6) It helps to take the important decisions for corrective actions.
Perpetual Inventory Records
Perpetual Inventory represents a system of records maintained by the organization. The records are of two types, viz.:
- Bin Cards
Bin Card is only quantitative record of stores receipt, issue and balance and is kept by the Storekeeper for each item of stores.
b.Stores Ledger:
Stores ledger is both quantitative and monetary value record of stores receipt, issue and balance and is prepared by the Cost Accounting Department.
The Difference between Bin Card and the Stores Ledger can be summarized as follows: (see the table below)
Bin Card |
Stores Ledger |
Bin Cards are maintained at the stores |
Stores Ledger is maintained in the Accounts department |
It is posted by Issue Clerk |
It is posted by Ledger Clerk |
Bin Cards meant for recording record of quantity |
It is as a record of quantity and value |
Transactions posted individually |
Transactions can be posted periodically |
Posting can be made at the time of issue. |
In stores ledger posting can be made after issue |
(3) Continuous Stock Verification:
Since Verification of physical inventory is an essential feature of a sound system of material control, a system of continuous stock taking is introduced.
Continuous stock taking ensures that the balances of all items of stocks are checked at least three to four times in a year by physical verification. It avoids long and costly procedure of closing down the stores for stock taking on periodical basis. Stock discrepancies are detected on timely basis and preventive measures can be taken.
The correctness of the physical stocks as reflected in the books is ensured and thus the monthly accounts represent a true and fair view of the business. Continuous Stock Verification not only serves as an essential tool of material control but also will help in proper presentation of accounting information to the management
Continuous Stock Taking Vs Periodic Stock Taking
The differences between Continuous Stock Taking and Periodic Stock Taking can be summarized as follows:
Continuous Stock Taking |
Periodic Stock Taking |
Continuous stock taking is held throughout the year. |
It is held once in a year. |
Stock discrepancies are detected and prevented without delay. |
Under this system preventive measure is the delay process. |
Under this system normal work will not be disrupted |
Under this system there is closing down the stores for stock taking |
Permanent personnel are required |
Temporary personnel are required. |
Long and costly procedure on continuous stock verification |
It is cheaper and shorter period is required |
Physical verification of materials are on random |
All materials are thoroughly checked |