Accounting Of Inventory Stock

Inventory is categorised as a Current Asset in ERPNext's Chart of Accounts. Inventory movements must be appropriately accounted for in order to guarantee that financial data is accurately reflected in reports such as the Balance Sheet and Profit and Loss Statement.

ERPNext offers two primary inventory accounting methods:

1. Perpetual Inventory (ERPNext's default and suggested)

Every stock transaction is automatically entered into the General Ledger (GL) using the Perpetual Inventory method. This comprises:

Purchase Invoices
Deliveries for Sales
Production processes
Transfers of Stock
Returns

Your general ledger and stock ledger will always be in perfect sync thanks to this system.

1.1 Transaction Flow:

Purchase receipts are issued when goods are received.

Dr. Stock-in-Hand (Asset) Cr. Stock Received But Not Billed

When a purchase invoice is issued for an item:

Dr. Stock Received But Not Billed Cr. Creditors (Accounts Payable)

Following the sale and delivery of goods (Delivery Note or Sales Invoice with "Update Stock"):

Cr. Stock-in-Hand (Asset) Dr. Cost of Goods Sold (COGS)

During manufacturing (via Stock Entry):

System deducts raw materials and adds finished goods based on valuation rate.

Returns:

Automatic posting of reverse accounting entries occurs.

1.2 Key Benefits of Perpetual Inventory:

Real-time stock and accounting accuracy are two of perpetual inventory's main advantages.
At the end of periods, there are no manual stock adjustments.
Financial statements are immediately impacted following stock movement.
Automatically handles cancellations and back-dated transactions
Completely supports Cost Vouchers Acquired
Warehouse-level account mapping for more detailed tracking is new in version 15.
Smooth interaction with sales Make a stock reservation order.
Compliant with manufacturing workflows and multi-level BOMs

Important: This approach is dependent on the rate at which items are valued. When completing inward transactions (such as production, material receipts, or purchase receipts), always enter an accurate valuation.

2. Periodic Inventory (Less Often Used Manual Adjustment Method)

ERPNext does not automatically generate accounting entries for stock transactions when using this method. Rather, at the conclusion of the accounting period, inventory values are manually adjusted.

2.1 How It Works:

Purchases: Purchases of inventory are immediately recorded as a cost of goods sold (COGS).
Sales Deliveries: Asset accounts are not automatically adjusted.
At Period-End: At the end of the period, the closing stock value is manually determined using either the system stock valuation or the physical count. The correct value is then reflected in a journal entry.
- In the event that closing stock rose: Dr. Stock-in-Hand Cr. COGS
- If the closing stock dropped: Dr. COGS Cr. Stock-in-Hand

2.2 When to Use Periodic Inventory:

Small businesses with little or no inventory movement can benefit from this strategy.
When comprehensive, real-time stock accounting is not necessary
When accounting is made simpler to make manual reporting easier