Perpetual Inventory
Perpetual inventory, also called continuous inventory, is when information about amount and availability of a product is updated continuously. Generally, this is accomplished by connecting the inventory system either with the order entry system or for a retail establishment the point of sale system.
A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
Periodic Inventory
Periodic inventory is when information about amount and availability of a product is updated only periodically. Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory. Most companies who use periodic inventory perform this at year-end.
Periodic vs. Perpetual
In earlier periods, non-continuous or periodic inventory systems were more prevalent. Many small businesses still only have a periodic system of inventory.
Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements. These errors lead to systematic errors in replenishment.
Periodic inventory is performed once a year.
Physically counting inventory ensures that book value and physical value are the same.
While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.