Does doing an Inventory Count under Perpetual Inventory Accounting make it Periodic?


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Weird question I know, but been having this debate at work.

We currently use journal entries similar to what you find in perpetual inventory accounting. Most "schoolbook" examples never talk about doing inventory counts when using perpetual inventory accounting - only when using periodic. However, in our real world, we have to do inventory counts each month and then make accounting adjustments accordingly.

We plan on automating this process and eliminating the hand counting. Because we are doing that, there are many now saying "we are going on to a perpetual inventory system" (note the word system). They consider that, because we are not hand counting anymore, it becomes perpetual. I argue in return that, we already are on perpetual inventory system because of the accounting method we are using and whether we hand count or not does not define what type of method or system we are using. So... the correct thing to put it (as I say) is that "we are going to automate our perpetual inventory system". We are not "going to a perpetual system... we are already on one"

Can you help me clarify? Or tell me where I may be wrong on this?
 
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Let me try and define some terms here before I answer your question - and a very good, solid question it is.
As you know, accounting has defined certain physical activities that are reflected within certain boundaries.
One of those boundaries is called period considerations. Now a period can, within any time frame, be dictated
by the industry norms. The brewing and fermenting process has dictates, not even close to many other
industries. And although monthly statements, weekly and even monthly payroll periods are a fact of life in
that industry, still, inventories have to reflect a stated and passing (accumulation) of value(s) that have
their peculiar cycle(s).
So, in your industry, reading your comments, I assume that a monthly cycle for inventory turns, is reasonable.
Therefore, reporting inventory at a point in time - like month end, is not all that unusual. Further more, in
order to get an added value of what went into inventory, all inventory, and what was/is, passed on from one
stage to another, then what was relieved, sold, trashed, etc., is also accounted for on an on going basis.
This on going basis is what your company calls - perpetual inventory system. This system is supported by
paper flows, job tickets, stock issues and receiving tickets, bills of lading and so forth. Such a system of
paper flow can be called perpetual, but still, a physical count is needed "periodically" to support this paper
flow "system", either at the end of a month, or some other cut off point in time. (I'll suggest a system that
accelerates this counting process, later)

Those that claim -
We plan on automating this process and eliminating the hand counting. Because we are doing that, there
are many now saying "we are going on to a perpetual inventory system" (note the word system).

Unfortunately, just because the flow of product/inventory, is now being systemized with a paper flow and
an automated audit trial, this is not a system that alleviates, or does away with, the process of physically counting, at
some point. Every automated documentation flow of material receivers off the docks, floor issues, crib stocks, in process
functions, and stores, has to have a physical count somewhere along the line to reinforce what the "automated documented
perpetual" reporting says.

So in a way - yes, you're both correct in the language - this is a perpetual inventory system, but in paper flow only.

It's important to remember, in manufacturing as in all enterprises, language is specific to the occupation. So when
dealing with non-financial personnel, kind of go with the flow with talking to people that bring their own assumptions
and language into the conversation. Try no to get into a ******* match with your non-financial folks. After all, you
need their cooperation a lot more than they need yours.

Every manufacturing management that I've worked with, absolutely hates the physical count process. This
process is an interruption in what they're their to do - produce. Invariably, workers on the factory floor
are expensive to just walk around and count stuff. So, usually, the cheaper that workforce is the better.
Unfortunately, many times you get what you pay for - especially on a Friday night, paycheck in pocket, and
all the guys are headed to the nearest American Legion Post after work. (Been there - done that - got the
T-shirt.)

Ok, here's what I suggest. Year end is a time usually set aside for a complete factory inventory of product.
That's a year end "period". But during the monthly "period" of reporting, you can streamline things by having
a CYCLE COUNTING system in place that's less invasive and doesn't disrupt the factory floor as much.
Here's how that works"
-Pick inventories that are easy to look at and count. Raw materials, cribs, finished goods, even possibly some
factory orders in process - simple stuff that doesn't require kitting/subassemblies and stuff. Use this CYCLE
COUNTING at the end of every week. Each week, only select a limited population, and rotate that selection
each week. Any adjustments are accumulated weekly and find those adjustments in the month end as
CYCLE COUNT SCHEDULES, thus adjusting book value accordingly. As you progress month to month, you
should also get a pretty good idea of just how well, or not, your paper flow is accounting for your "book
perpetuals". Be reasonable with the amount to count and those with the highest value should take a front
row seat.

In any event, did I answer your question(s) completely? Is there something that I may have overlooked?
I ask because this is a complex question dealing with the assumptions and terminology of people in and out
of the profession.
 

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