Perpetual Inventory system is a method of recording inventory purchased, sold, exchanged etc. It is referred to as the perpetual inventory system since it automatically affects the inventory account after each inventory transaction such as buying inventory, selling inventory or disposing inventory. It keeps a running balance of the inventory account.
Example:
On July 1st 201x, Adequate Disclosure purchases 700 units of inventory for $10/each.
DR: Inventory $7,000
CR: Cash $7,000
On July 18th 201x, Adequate Disclosure sells 60 units for $12/each.
DR: Cash $720
CR: Sales $720
$12 x 60 = $720
DR: Cost of Goods Sold $600
CR: Inventory $600
$10 x 60 = $600
On July 31st 201x, Adequate Disclosure purchases 800 units for $10/ each on account.
DR: Inventory $8,000
CR: Accounts Payable $8,000
$10 x 800 = $8,000