Accounting of Inventory Stock
Inventory is treated as a Current Asset because it represents goods owned by a business that are available for sale or production. ERPNext supports two methods of inventory accounting: Perpetual Inventory and Periodic Inventory.
Choosing the appropriate inventory accounting method determines how stock movements affect your accounting records and financial statements.
Perpetual Inventory is enabled by default for new companies in ERPNext. To use it, an Inventory Account (Account Type: Stock) must be configured either at the Warehouse, Group Warehouse, or Company level.
1. Perpetual Inventory (Automatic Inventory Accounting)
Under the Perpetual Inventory system, ERPNext automatically creates General Ledger entries whenever a stock transaction occurs. This ensures that stock values and accounting balances always remain synchronized.
Whenever inventory is purchased, it is recorded as Stock In Hand (Current Asset). When inventory is sold, ERPNext automatically records the corresponding Cost of Goods Sold (COGS).
- A Purchase Receipt increases Stock In Hand.
- A Delivery Note or Sales Invoice decreases Stock In Hand.
- The corresponding Cost of Goods Sold is recorded automatically.
- General Ledger entries are created immediately for every stock movement.
As a result, the Stock Ledger and the General Ledger always remain in sync.
Benefits of Perpetual Inventory
- Automatically updates inventory accounting for every stock transaction.
- Keeps Stock Ledger and General Ledger synchronized.
- Provides real-time inventory valuation.
- Produces more accurate Balance Sheet and Profit & Loss reports.
- Automatically recalculates future stock valuation when backdated transactions or Landed Cost Vouchers affect inventory value.
Perpetual Inventory relies on accurate valuation rates. Incorrect valuation during Purchase Receipts, Material Receipts, Manufacturing, or Repack transactions will directly impact inventory value and accounting entries.
2. Periodic Inventory
In the Periodic Inventory system, ERPNext does not automatically create accounting entries for stock movements.
Instead, inventory adjustments are performed manually at the end of an accounting period to reconcile stock values with the accounting records.
- Inventory purchases are recorded as expenses.
- Sales are recorded normally during the accounting period.
- At the end of the period, the remaining inventory is valued.
- A manual journal entry transfers the inventory value from expenses to Stock In Hand.
If the closing inventory value is higher than the previous period, expenses are reduced and inventory assets increase. If the inventory value decreases, the opposite adjustment is made.
3. Comparison
| Feature | Perpetual Inventory | Periodic Inventory |
|---|---|---|
| Accounting Entries | Created automatically for every stock transaction | Created manually at the end of the accounting period |
| Inventory Value | Always up to date | Updated only after periodic adjustments |
| General Ledger | Continuously synchronized with Stock Ledger | Requires manual reconciliation |
| Balance Sheet Accuracy | Real-time | Updated periodically |
| Recommended For | Most businesses using ERPNext | Organizations following traditional periodic inventory accounting |
4. Summary
ERPNext supports both Perpetual Inventory and Periodic Inventory accounting methods. Perpetual Inventory automatically creates accounting entries for every stock movement, keeping inventory and financial records synchronized in real time. Periodic Inventory, on the other hand, requires manual adjustments at the end of each accounting period to update inventory values in the accounts.
