A perpetual inventory system is one which updates inventory after each purchase and at periodic intervals. Both the inventory ledger and the quantities associated are updated continuously. The three main types of perpetual inventory systems are: last in first out(LIFO), first in first out(FIFO), and average cost. All three require the same calculation. Here's how to do it.
Walk through an example. On January 1, XYZ company purchased 1,000 units of merchandise at $50 per unit. The company sold 200 units by the end of February. Calculate the ending inventory.
Review the formula. The formula for calculating inventory using the perpetual inventory system is: Beginning inventory plus purchases during the period, minus the cost of goods sold.
Calculate purchases. The number of purchases equals the number of units (1000) times the purchase price ($50), or $50,000.
Calculate the ending value of inventory. This equals total purchases, minus the ending balance of inventory (in our example beginning inventory is 0). Total purchase equals $50,000. Two hundred units were sold, so the new ending inventory balance is $50,000 minus 200 x $50, which equals $40,000. Another way to compute this is to subtract the number of units sold from the original units purchased and then multiply by $50. This equation is: (1000-200)x$50.