Perpetual inventory system:-

In perpetual inventory system record of all receipt and issues of materials are maintained properly. When merchandise is purchased its cost is debited to an asset account called inventory. As the merchandise is sold/issued, its cost is removed from inventory account and transferred to the cost of goods sold account. In this system inventory records are kept continuously up-to-date. The inventory on hand and the cost of goods sold for the year are determined under perpetual inventory system. All large business organizations use perpetual inventory systems.

Periodic inventory system:-

In periodic inventory system no proper record of receipt and issues are maintained. In this system the cost of merchandise purchased during the year is debited to purchases account, rather than to the inventory account. When merchandise is sold to a customer an entry is made recognizing the sale revenue, but no entry is made to reduce the inventory account or to recognize the cost of goods sold. Small businesses however use periodic inventory system.