Accounting Of Inventory Stock

The value of available inventory is treated as an Asset in company's Chart of Accounts. Depending on the type of items, it can be treated as Fixed Asset or Current Asset. To prepare Balance Sheet, you should make the accounting entries for those assets. There are generally two different methods of accounting for inventory:

1. Auto / Perpetual Inventory

In this process, for each stock transactions, the system posts relevant accounting entries to sync stock balance and accounting balance. This is the default setting in ERPNext for new accounts.

When you buy and receive items, those items are booked as the company’s assets (stock-in-hand / fixed-assets). When you sell and deliver those items, an expense (cost-of-goods-sold) equal to the buying cost of the items is booked. General Ledger entries are made after every stock transaction. As a result, the value as per Stock Ledger always remains same with the relevant account balance. This improves accuracy of Balance Sheet and Profit and Loss statement.

To check accounting entries for a particular stock transaction, please check examples

1.2 Advantages of Perpetual Inventory

Perpetual Inventory system will make it easier for you to maintain accuracy of company's asset and expense values. Stock balances will always be synced with relevant account balances, so no more periodic manual entry has to be done to balance them.

In case of new back-dated stock transactions or cancellation/amendment of an existing transaction, all the future Stock Ledger entries and GL Entries will be recalculated for all items of that transaction. The same is applicable if any cost is added to the submitted Purchase Receipt, later through the Landed Cost Wizard.

Note: Perpetual Inventory totally depends upon the item valuation rate. Hence, you have to be more careful entering valuation rate while making any incoming stock transactions like Purchase Receipt, Material Receipt, or Manufacturing / Repack.

2. Periodic Inventory

In this method, accounting entries are manually created periodically, to sync stock balance and relevant account balance. The system does not create accounting entries automatically for assets, at the time of material purchases or sales.

In an accounting period, when you buy and receive items, an expense is booked in your accounting system. You sell and deliver some of these items.

At the end of an accounting period, the total value of items to be sold, need to be booked as the company’s assets, often known as stock-in-hand.

The difference between the value of the items remaining to be sold and the previous period’s stock-in-hand value can be positive or negative. If positive, this value is removed from expenses (cost-of-goods-sold) and is added to assets (stock-in-hand / fixed-assets). If negative, a reverse entry is passed.

This complete process is called Periodic Inventory.

If you are an existing user using Periodic Inventory and want to use Perpetual Inventory, you have to follow some steps to migrate.

  1. Perpetual Inventory
  2. Migrate to Perpetual Inventory
  3. Managing Batch Wise Inventory