Which description best defines perpetual inventory versus periodic inventory?

• A. Perpetual updates in real-time with each transaction; periodic updates at fixed intervals.
• B. Perpetual is counted annually; periodic is continuous.
• C. Perpetual tracks only sales; periodic tracks only purchases.
• D. Perpetual uses magnetic tape; periodic uses paper logs.

Answer: (A)

The main idea here is how inventory updates are recorded over time. In a perpetual inventory system, every purchase and every sale is recorded as it happens, so the inventory balance and the cost of goods sold are kept up to date in real time. In a periodic inventory system, there’s no continuous tracking of inventory levels; updates are made only at fixed intervals (like monthly or quarterly), and the ending inventory, which determines cost of goods sold, is found by a physical count rather than ongoing records.

This is why the statement describing perpetual as real-time updates with each transaction and periodic as updates at fixed intervals is the best description. The other statements misstate how these systems work: perpetual isn’t counted annually while periodic isn’t continuous (the reverse is true); both systems track purchases and sales (not just one or the other); and the method of record-keeping (magnetic tape vs paper logs) isn’t what defines the inventory system.