What Is a Perpetual Inventory System?
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Talk to our experts- Perpetual inventory
- A perpetual inventory system keeps a running record of each item's on-hand balance by recording every receipt and shipment, so the books show current quantities and cost between counts. Physical counts are still taken at reasonable intervals, and the recorded balance is adjusted to agree with what was actually counted.
Also called: Perpetual inventory system
How it works
Perpetual inventory is one of the two general types of inventory systems described in GAO's 2002 executive guide on physical inventory counts, written to help federal agencies: a perpetual inventory system maintains current item balances by recording receipts and shipments, while a periodic inventory system tracks receipts and shipments in a purchases account and infrequently updates item balances.
IRS Publication 538 covers it under Perpetual or Book Inventory: you can figure the cost of goods on hand by either a perpetual or book inventory if inventory is kept by following sound accounting practices.
- Inventory accounts are charged with the actual cost of goods purchased or produced.
- They are credited with the value of goods used, transferred, or sold.
- Credits are based on the actual cost of goods acquired during the year and their inventory value at the start of the tax year.
- You must take a physical inventory at reasonable intervals, and the book amount must be adjusted to agree with the actual inventory.
As of October 28, 2026, these rules come from IRS Publication 538 (revised January 2022). This is general information, not tax or accounting advice.
Perpetual vs periodic inventory
- Periodic inventory: receipts and shipments are tracked in a purchases account and item balances are updated infrequently.
- Perpetual inventory: current item balances are kept by recording receipts and shipments, so the balance is known before the next count.
- Cycle counting: GAO says a perpetual system is needed for cycle counting, to provide current balances for reconciliation of the system and physical count quantities. All seven leading-edge private-sector companies GAO studied for that guide had perpetual inventory systems.
Common problems
A perpetual record can drift from the shelf. GAO lists factors that cause the record of on-hand inventory to differ from the physical quantity counted: omission of items from the count, incorrect counts, errors in cutoff, and improper recording or reconciliation of count results. The IRS still requires a physical inventory at reasonable intervals, with the book amount adjusted to agree with it.
Example
A distributor's record shows 500 units of a fitting at the start of the week.
- First, a receipt of 200 units is posted: 500 + 200 = 700.
- Then shipments of 350 units are posted: 700 - 350 = 350 on the record.
- A count finds 344 units, so the book amount is adjusted by 344 - 350 = -6 units to agree with the actual inventory.
On Shopify
Shopify tracks inventory by state at each location. On hand inventory refers to all inventory units that you have at a location, and is the total of Committed, Unavailable, and Available inventory.
- Orders: in Shopify's Inventory adjustment changes report, a new order for 3 units of SKU-A shows the Available inventory decreasing by 3 units and the Committed inventory increasing by 3 units.
- Adjustment history: the same report shows manual adjustments, adjustments from inventory apps, inventory transfers and order fulfillments.
- Counts: a stock count lets you record a physical count of inventory at one of your store locations. When you approve a count, your inventory levels are updated and can't be undone.
How Uncap helps
Uncap's guide to multi-warehouse inventory visibility explains why the storefront needs the live balance: real-time sync between the ERP and the storefront updates stock the moment it changes instead of on a batch schedule that runs once or twice a day. Uncap Connect keeps your store and your ERP in real-time, two-way sync, and your ERP stays the system of record.
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Frequently asked questions
What is perpetual inventory?
Perpetual inventory is a system that maintains current item balances by recording receipts and shipments. The IRS lets a business figure the cost of goods on hand with a perpetual inventory kept by sound accounting practices, as long as a physical inventory is taken at reasonable intervals and the book amount is adjusted to agree with it.
Is perpetual inventory the same as FIFO?
No. FIFO is a method for identifying which costs belong to the items in inventory, one of three the IRS lists with specific identification and LIFO. A perpetual inventory is a way of keeping the record of what is on hand, by recording each receipt and shipment.
What is one disadvantage of the perpetual inventory system?
The record can drift from what is on the shelf. GAO lists omitted items, incorrect counts, cutoff errors and improper recording or reconciliation of count results as causes. The IRS still requires a physical inventory at reasonable intervals.
Does the perpetual inventory system have purchases?
Yes, but purchases are posted as receipts to the inventory account. Under IRS Publication 538, perpetual inventory accounts are charged with the actual cost of goods purchased or produced. A periodic system instead tracks receipts and shipments in a purchases account, as GAO describes it.
