Perpetual Inventory
With the perpetual inventory system, an automatic accounting entry is made for all stock transactions immediately. This implies that whenever stock is received or issued, the financial accounts are updated immediately to account for the change. However, if perpetual inventory is disabled, accounting entries for stock are made only periodically, for example, on a monthly or quarterly basis.
In this system, each warehouse is associated with a particular account head in the Chart of Accounts. This association ensures that all stock movements in and out of a warehouse appear directly in the respective accounting ledger.
When materials are received into a warehouse, the balance in the linked account for that warehouse increases, indicating an increase in assets. When materials are delivered or issued out of the warehouse, the system debits the expense account appropriately and decreases the balance of the linked account for the warehouse.
1. Activating perpetual inventory
- To activate the perpetual inventory feature in ERPNext, proceed as follows:
Path:
When perpetual inventory is enabled, the system automatically posts accounting entries for all stock transactions. However, if perpetual inventory is disabled, users must manually create and manage these accounting entries.
- Prior to activating this, complete the default accounts below that should be set up correctly per Company. These are the accounts that are normally created as an installation of ERPNext:
Default Inventory Account (Asset): is a report on the total value of the stock in hand.
Stock Received But Not Billed (Liability): Contains goods received by us but not billed by us on the suppliers.
Stock Adjustment Account (Expense): This entry is used in recording an adjustment to the stock using write offs, gains or losses.
Expenses (Expense): Shows extra expenses (e.g. freight, duties) that bring value to stock.
Cost Center: The cost allocation node used for recording expenses in respect to stock movement.
- If you want separate individual accounts for every warehouse, do the following process:
- Go to:
Create a new account with the same warehouse name.
Open the warehouse record and associate it with the new account.
This configuration allows you to view and filter accounting statements for every warehouse independently.
- For each stock transaction, ERPNext creates General Ledger (GL) entries on the basis of the account head associated with the respective warehouse. In case the warehouse does not have an assigned account, the system will look to its parent warehouse for an associated account. In case no account is defined there as well, ERPNext will make use of the Default Inventory Account from the Company master.
2. Example
In order to get a better idea of how perpetual inventory works in ERPNext, let's take a look at an example Chart of Accounts and warehouse setup for a company. This example will give a clearer picture of how account heads are associated with warehouses and how the transactions cascade into the accounting ledgers.
Chart of Accounts:
Assets (Dr)
Current Assets
Accounts Receivable
Debtors
Stock Assets
Stores
Finished Goods
Work In Progress
Tax Assets
VAT
Liabilities (Cr)
Current Liabilities
Accounts Payable
Creditors
Stock Liabilities
Stock Received But Not Billed
Tax Liabilities
Service Tax
Income (Cr)
Direct Income
Sales Account
Expenses (Dr)
Direct Expenses
Stock Expenses
Cost of Goods Sold
Expenses Included in Valuation
Stock Adjustment
Indirect Expenses
Shipping Charges
Customs Duty
2.1 Warehouse - Account Configuration
In this case, each warehouse will be posted to a specific account head under Stock Assets section of the Chart of Accounts. This is useful in maintaining record of the movement of stock in each of the warehouses and valuing stock separately.
Stores: The use of Clegged with the account stock assets stored by Stores that track stock of raw materials or purchased communicated in hold ready to use.
Work In Progress: Associated with the "Work In Progress" account to monitor half-finished goods in the course of manufacture.
Finished Goods: Associated with the "Finished Goods" account to monitor finished stock ready for sale or despatch.
By placing the warehouses in this way, ERPNext can maintain the current stock valuation accurately and create warehouse-wise accounting and inventory reports automatically, that is free of any manual input.
2.2 Purchase Receipt
Assuming that your company has purchased 10 pieces of the item code, RM0001, $200 units per piece of the vendor, Arcu Vel Quam Fabricators. The details as are entered on the Purchase Receipt have been summarized in the table below:
Supplier: Arcu Vel Quam Fabricators
Items:
Taxes:
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
In the case of a perpetual inventory system when this Purchase Receipt is posted the following accounting is made:
This increases the value of the same stock to the Stores warehouse and therefore the Stores account (under Stock Assets) is debited.
At the same time, Stock Received But Not Billed is credited to the temporary account.This is to abide by the double-entry accounting principle since the invoice of the supplier has not been accounted for yet.
For charges that fall under "Valuation" or "Total and Valuation" classification in the Taxes and Charges table (e.g., Shipping Charges and Customs Duty), ERPNext posts a negative expense against the respective expense account. This adjustment avoids double booking of expenses because these amounts are already being included in stock valuation.
This practice makes both the stock ledger and the general ledger perfectly balanced, with correct inventory valuation and financial reporting.
2.3 Purchase Invoice
Once you receive the bill of the items the supplier inserted in the Purchase Receipt, you will create a Purchase Invoice with the same purchase. This entry considers the obligation with the supplier and completes the accounting process of the purchase.
General Ledger (Perpetual Inventory)
The Stock Received But Not Billed account is subtracted in this process, and therefore, it can be seen that the temporary credit created at the time of posting Purchase Receipt is reversed. This balances the purchase transaction to the full and what was left as a liability is transferred to the Accounts Payable ledger to the supplier.
2.4 Delivery Note
Suppose now that you are receiving a delivery order of a item "Automation Services of Utah" and you have 5 pieces of item number RM0001 to make a delivery at a selling price of 300. The following are the contents filled in the Delivery Note:
Customer: Utah Automation Services
Items:
Taxes:
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
When the items are shipped out of the Stores warehouse, ERPNext automatically does the following accounting operations:
The value of the delivered quantity is credited to the Stores account to decrease the value of the stock.
An equal quantity (valuation basis) is debited to the Cost of Goods Sold account. This accounts for the cost of goods sold.
The credit and debit figures equal the total valuation value (the cost of purchase) of the goods supplied. This valuation value is computed based on your company's selected method of valuation—FIFO, Moving Average, or actual cost of serialized inventory.
In the example above, the method of valuation employed is FIFO:
Valuation Rate = Purchase Rate + (Charges Included in Valuation per unit) = 200 + (250 ÷ 10) = 225
Total Valuation Amount = Valuation Rate × Quantity Sold = 225 × 5 = 1125
This method ensures that the cost of goods sold represents the true purchase price, plus any additional charges that have been allocated for valuation.
2.5 Sales Invoice with Update Stock
In this case, rather than generating a Delivery Note for the order to Utah Automation Services, you generate directly a Sales Invoice with the "Update Stock" option activated. The format of the Sales Invoice is the same as that in the previous Delivery Note example.
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
When this kind of Sales Invoice is posted, ERPNext makes the standard accounting journal entries for a sale transaction—debiting Accounts Receivable (or Cash/Bank) and crediting Sales Income. Additionally, since the Update Stock option is checked, the system also posts the inventory-related accounts:
The Stores account is credited to adjust the warehouse stock value for the quantity sold.
The Cost of Goods Sold account is debited by the valuation amount of the goods sold, allowing proper tracking of expenses against the sale.
This avoids the necessity of a separate Delivery Note, as both the inventory movement and the sales are managed in one document.
2.6 Stock Entry (Material Receipt)
This is the type of stock entry applied when goods are received into stock without an associated purchase transaction—e.g., goods produced, donations, or internal adjustments.
Items:
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
At posting, the Stores account is debited to record the increase in stock value, and the offsetting entry is posted to the relevant account (e.g., Stock Adjustment or an alternate account associated with the transaction type).
2.7 Stock Entry (Material Issue)
A Material Issue stock entry occurs when stock is withdrawn from inventory without a sale—such as issuing materials for internal use, scrapping defective items, or correcting stock differences.
Items:
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
On submission, Stores account is credited to reduce the inventory value, and the matching debit is recorded in the respective expense account, i.e., Stock Adjustment or any other specified account depending on the purpose of issue.
2.8 Stock Entry (Material Transfer)
Material Transfer stock entries are utilized to transfer inventory between warehouses within the company without impacting total stock value.
Items:
Stock Ledger (Perpetual Inventory)
General Ledger (Perpetual Inventory)
At the time of posting this entry, ERPNext decreases the value of the stock in the Source Warehouse account (credit) and increases it in the Target Warehouse account (debit) for the very same amount. As it is an internal transfer, there is no effect on overall inventory valuation or income/expense accounts.