A perpetual inventory system is an inventory system where the company keeps updating the quantity of the inventory available with the company on a constant basis. In simple words perpetual inventory system is like price of stock, just as the price of stock rise or fall with rise or fall in profit of the company in the same way perpetual inventory system works. Hence if company makes any purchase of inventory than it will be added immediately to the inventory of the company and if the company sells from inventory to third parties it is deducted immediately from the available inventory.
The biggest advantage of perpetual inventory system is that it eradicates the task of estimating inventory on a monthly basis; another advantage of this method is that company knows the exact level of inventory available with the company at any given point of time and therefore company can give orders for purchase of inventory before the inventory is finished and therefore avoid the embarrassment arising out of non availability of inventory with the company when the customers come.
Perpetual inventory system is very difficult to carry out because it needs constant monitoring and it can be impossible in case of inventory turnout is very high which is the case with companies which are large, another disadvantage of perpetual inventory system is that it requires use of technology which is very costly and therefore small companies cannot afford to have perpetual inventory system.