Why Physical Inventory Counts are Still Vital in a Perpetual Inventory System

If using a perpetual system, companies take a physical inventory for the following reasons:

1. To check the accuracy of their perpetual inventory records.2. To determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.

A perpetual inventory system is one in which the inventory balances are updated continuously and in real-time, thereby providing a clear and accurate picture of inventory levels and associated costs at any point in time. Despite this, companies still opt to conduct physical inventory counts for the following reasons:

1. Verification of accuracy: The perpetual inventory system is only as reliable as the accuracy of the data entered into it. A physical inventory count helps to verify the accuracy of the inventory records, thereby enhancing the reliability of the perpetual inventory system.

2. Detection of theft or fraud: Physical inventory counts can help companies detect incidences of theft or fraud. The actual counts can be compared to the inventory records to determine if there are any inconsistencies that could be indicative of theft or fraud.

3. Assurance of compliance: Certain products may require specific regulations in terms of storage, handling, and even disposal. Physical inventory counts help ensure that compliance is maintained for such products.

4. Evaluation of asset values: In a perpetual inventory system, inventory values are determined based on an average cost per unit. However, this may not always reflect the true market value of the inventory. A physical count can help evaluate the actual value of the inventory.

5. Identification of slow-moving or obsolete inventory: Physical inventory counts may reveal instances of slow-moving or obsolete inventory, which can then be taken care of by the company. This can help the company reduce unnecessary carrying costs associated with such inventory items.

In conclusion, physical inventory counts serve as a vital component of inventory management, even when a perpetual inventory system is in place. Conducting regular physical counts can help companies improve accuracy, detect theft and fraud, ensure compliance, evaluate asset values, and identify slow-moving or obsolete inventory.

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