Perpetual Inventory System: Test Your Stock Records in India

A perpetual inventory system updates the stock ledger and the cost of goods sold (COGS, the cost of the items you sold) on every transaction, so book stock is known at any moment. A periodic system updates stock only when you count, then works out COGS at period end from that count. Below, "perpetual system" means the system and "perpetual ledger" means its stock record.

The journal entries follow the standard treatment in OpenStax Principles of Financial Accounting. The last row matters most in practice. Under a periodic system, a missing carton raises COGS and nobody sees it as a loss. Under a perpetual system, the book figure comes first, so the shortfall shows up as a number you can investigate.

Run perpetual as soon as any one of these is true: you hold stock in more than one location, you track lots, expiry dates or serial numbers, you promise stock to customers before it ships, or you need a true gross margin every month. A periodic system is enough for one location, a short item list and a monthly count. These thresholds are our recommendation.

The reasoning is about what you cannot see. With two warehouses, a periodic count tells you the total but not where the shortage sits. With expiry dates, a count tells you quantity but not which batch to sell first. With confirmed orders, a count cannot tell sales what is already promised. A manufacturer or distributor with any of these needs a ledger that moves with every transaction.

Four causes account for drift in a perpetual system: movements never posted, movements posted late across a period end, movements posted to the wrong location or unit, and movements posted at the wrong cost. This is our classification, not a measured split. Software does not remove any of them. It makes each one visible.

• Unposted. A free sample, a scrapped pallet or a rejected delivery leaves the shelf but never reaches the ledger.
• Late. A dispatch on the 30th posted on the 2nd puts the sale and the stock reduction in different months.
• Wrong location or unit. Stock received into the wrong warehouse, or a pack of 12 posted as 12 singles.
• Wrong cost. A purchase booked with goods and services tax (GST) included when you can claim the input tax credit. Both Ind AS 2 and AS 2 leave out of inventory cost any taxes you can later recover from the tax authorities. Ind AS 2 is the Indian Accounting Standard on inventories and AS 2 is the Accounting Standard on valuation of inventories; which one applies to you is explained below. If the credit cannot be claimed, the tax is part of cost.

A perpetual system therefore changes how you count, not whether you count. Instead of one yearly shutdown, you check a rotating slice against the book figure. Our guides on cycle counting and inventory shrinkage cover the schedule and the write-off entries. Matching what arrives to what was ordered, using a goods receipt note, stops the first cause at the door.

The cost method changes the profit a perpetual system reports, even when purchases and sales are identical. Ind AS 2 applies to companies that fall under the Companies (Indian Accounting Standards) Rules, 2015 by listing or net-worth thresholds, or that opt in. Most other companies follow AS 2. Both standards allow FIFO or weighted average cost, applied consistently to items of a similar nature and use. Neither allows last-in, first-out (LIFO).

This is our model, using one item and invented figures, all excluding GST. Opening stock is 100 units at ₹40. We buy 200 units at ₹44, sell 150, buy 100 units at ₹50, then sell 180. Closing stock is 70 units. Moving average is the weighted average recalculated after every receipt.

Each row adds back to ₹17,800, the total cost of goods available. FIFO reports ₹385 less COGS than the periodic average, about 2.7% of the FIFO figure, because prices rose during the month. Pick one formula, apply it consistently, and make sure your software applies the one you chose.

Now add a count. The shelf shows 62 units against 70 in the system. The 8 missing units cost ₹400 at the FIFO layer of ₹50. The entry is debit stock loss ₹400, credit Inventory ₹400. That is 11.4% of this item's quantity and of its value. A periodic system would have buried the same ₹400 inside COGS.

Run three checks in one working day: confirm that movements post on time, count 30 lines against the system, and rebuild the cost of one item by hand. Each has a pass and a fail, so you finish with a list of fixes. The cut-offs below are our recommendation, not an accounting standard.

Are your stock movements posted when they happen?

Pass means every sampled movement carries a posting date within one working day of the physical event. Check the last 20 receipts, the last 20 dispatches, 5 warehouse transfers, the last 10 returns or scrap entries, and 5 production orders (manufacturers). Then check whether the COGS ledger moves on the invoice date. Fail on any receipt or dispatch posted in a month-end batch, any transfer with an "out" but no "in", or a COGS ledger that moves only when you count.

Do 30 counted lines match the system?

Pass means all three of these hold: at least 28 of the 30 lines match exactly; the total absolute difference between count and book, divided by the total book value of the 30 lines, is 2% or less; and none of the 10 highest-value lines is off. Fail on any one. Pick the 30 lines this way: the 10 highest in value, 10 chosen at random and the 10 fastest-moving. Freeze movements on those lines while you count. Log each mismatch as unposted, late, wrong location or unit, or wrong cost.

Does the system's cost match a rebuild?

Pass means your hand-built COGS for one fast item equals the system's figure for the month. Rebuild it from opening stock and the month's receipts and issues, using the FIFO or moving-average method shown in the worked cost example. Fail if the system's figure matches neither. That points to a costing setup error, often a different valuation method on the item record than the one in your accounting policy.

As of October 2026, the Companies (Auditor's Report) Order, 2020 (CARO 2020, notified as S.O. 849(E) on 25 February 2020) does not apply to one person companies, to small companies, or to qualifying private companies. A small company has paid-up capital up to ₹10 crore and turnover up to ₹100 crore, under limits in force since 1 December 2025 (Companies (Specification of definition details) Amendment Rules, 2025). A qualifying private company is not a subsidiary or holding company of a public company, and has paid-up capital and reserves, borrowings and revenue within ₹1 crore, ₹1 crore and ₹10 crore.

If you are outside the Order, the test below is still the right routine, because your year-end stock figure still has to be supported by a count. Most small and mid-sized businesses are outside CARO 2020 on these limits.

If your company is inside it, clause 3(ii)(a) asks the auditor to report whether management verified inventory physically at reasonable intervals, and whether discrepancies of 10% or more in the aggregate for each class of inventory were noticed and properly dealt with in the books. A perpetual ledger gives the auditor a book figure to test against. It does not replace the verification. As an illustration, in a class carried at ₹10,00,000, a net discrepancy of ₹1,00,000 reaches the 10% line.

Clause 3(ii)(b) applies to companies with working-capital limits above ₹5 crore from banks or financial institutions. It asks whether the quarterly returns filed with those lenders agree with the books of account. Stock statements built from a perpetual ledger agree easily with the books, but only if the ledger is right.

We built Arka Inventory so that each posting is a routine step of the work. Receipts, warehouse transfers, bin putaway and picking are recorded against a warehouse, with barcode, QR code and pallet-label scanning and FIFO picking, so the ledger moves when the goods do. We build it natively on Salesforce.

• One live view. Inventory visibility shows stock across warehouses, inventory on order, expected lead times and raw-material availability. Your sales teams see what they can promise to customers, not just what is on the shelf.
• Stock held for orders. Commit Inventory lets you commit, allocate and reallocate stock to orders, which prevents overselling.
• Your own reports. Custom reports and dashboards give you real-time data and key performance indicators, so the test results above can sit on a screen you review.
• Traceability. On our Enterprise plan, lot, batch, expiry-date and serial-number tracking makes counts by batch practical.
• Integrations. We publish integrations with Salesforce, QuickBooks Online and Tally. Our Tally integration guide describes invoices, bills and inventory-level changes flowing across. Our QuickBooks Online page describes accounting entries for cost allocations.

We do not replace counting. We make the gap between book and shelf easy to see, and we suggest running the three-part test in the first week of a trial because it doubles as a check on data readiness. Our trial is 15 days with full access and no credit card. Onboarding takes a minimum of two weeks, and you provide your inventory, product and warehouse data.

As of October 2026, our yearly plans on our pricing page start at $199 a month for Basic (one user licence) and $499 a month for Advance (two user licences), billed annually, in US dollars. Additional users cost $42 a month on Basic and $52 a month on Advance. Enterprise pricing is custom. To see it working on your own stock, book a demo with our sales team.