Managing inventory is a core part of any business, but how you account for it can make a huge difference in your financial accuracy. In the world of ERP systems like ERPNext, you generally have two choices: Perpetual Inventory or Periodic Inventory. While the first is a modern, real-time approach, the second relies on manual, periodic updates.
1. The Periodic Inventory Method: Manual Updates
In contrast, the periodic method is a manual process that doesn’t create automatic accounting entries for assets during purchases or sales.
- How it works:
- When you buy stock: An expense is booked, but it doesn’t automatically become an asset.
- At the end of an accounting period: You manually determine the value of your remaining stock. You then create an accounting entry to book this value as a current asset. The difference between your current and previous period’s stock-in-hand value is then manually adjusted against your COGS.
- The Drawback: This method requires manual intervention to keep your stock and accounting balances in sync. It’s less efficient and more prone to errors than the perpetual method, as it relies on periodic, manual entries instead of real-time automation.
To activate periodic inventory
Home > Accounting > Company > Disable Perpetual Inventory
Examples of Periodic Inventory in ERPNext
- Purchase Receipt:-
| Item | Warehouse | Quantity | Rate | Amount |
| Ink | Store | 100 | Rs 1000 | Rs 1,00,000 |
Stock Ledger
- Purchase Invoice:-
| Item | Warehouse | Quantity | Rate | Amount |
| Ink | Store | 100 | Rs 1000 | Rs 1,00,000 |
General Ledger
- Delivery Note
| Item | Warehouse | Quantity | Rate | Amount |
| Ink | Store | 40 | Rs 1200 | Rs 48000 |
Stock Ledger
- Sales Invoice
| Item | Warehouse | Quantity | Rate | Amount |
| Ink | Store | 40 | Rs 1200 | Rs 48000 |
General Ledger
2. The Perpetual Inventory Method: Real-Time Accuracy
The perpetual inventory method is the default for new accounts in ERPNext, and for good reason. This system ensures your financial records are always in perfect sync with your stock levels.
To activate perpetual inventory
Home > Accounting > Company > Enable Perpetual Inventory
● How it works: With every single stock transaction, the system automatically posts the relevant accounting entries.
When you buy stock: As soon as items are received, they’re booked as a current asset on your balance sheet, typically in a stock-in-hand account.
When you sell stock: When items are delivered, an expense called Cost of Goods Sold (COGS) is automatically recorded. This COGS value is equal to the item’s landed cost (purchase price plus any other costs).
- The Big Advantage: This automated process means your Stock Ledger and General Ledger are always aligned. You don’t have to perform manual entries to balance them, saving you time and preventing errors. This leads to a more accurate Balance Sheet and Profit and Loss statement. Even if you make a back-dated entry, amend a transaction, or add a landed cost later on, the system automatically recalculates all future ledger entries, ensuring your data remains consistent.
A quick note: The accuracy of this method depends heavily on the valuation rate you enter during incoming stock transactions. So, be careful when recording costs like those from purchase receipts or manufacturing.
Examples of Perpetual Inventory in ERPNext
- Purchase Receipt :- Suppose you have purchased 100 nos of item Notepad at Rs 100 from supplier “Summit Traders Ltd”. Following are the details of Purchase Receipt:
| Item | Warehouse | Quantity | Rate | Amount |
| Notepad | Store – CL | 100 | Rs 50 | Rs 5000 |
Stock Ledger
General Ledger
As stock balance increases through Purchase Receipt, “Store” accounts are debited and a temporary account “Stock Receipt But Not Billed” account is credited, to maintain double-entry accounting system.
- Purchase Invoice :-
| Item | Warehouse | Quantity | Rate | Amount |
| Notepad | Store – CL | 100 | Rs 50 | Rs 5000 |
General Ledger
Here “Stock Received But Not Billed” account is debited and nullified the effect of Purchase Receipt.
- Delivery Note:- Let’s say, you have an order from “Arihant Techno Pack Private Limited” to deliver 20 nos of item “Notepad” at Rs 60. Following are the details of Delivery Note:
| Item | Warehouse | Quantity | Rate | Amount |
| Notepad | Store – CL | 20 | Rs 60 | Rs 1200 |
Stock Ledger
General Ledger
As an item is delivered from “Stores” warehouse, “Stores” account is credited and an equal amount is debited to the expense account “Cost of Goods Sold”.
- Sales Invoice:-
General Ledger
Comparison table to help you to choose between Perpetual and Periodic inventory –
Perpetual vs. Periodic Inventory in ERPNext
| Aspect | Perpetual Inventory | Periodic Inventory |
| Definition | Real-time inventory system where every stock movement automatically updates accounting and stock ledgers. | Manual system where inventory and accounting are updated only at the end of an accounting period. |
| Automation | Fully automated — every transaction (Purchase, Sale, Delivery, etc.) posts relevant accounting entries instantly. | Manual — accounting entries for stock are recorded periodically, not at the time of each transaction. |
| Stock Updates | Stock balances are continuously updated with every transaction. | Stock balances are updated manually at period-end based on physical count or valuation. |
| COGS (Cost of Goods Sold) | Automatically calculated and recorded in real time when goods are sold or delivered. | Determined manually at the end of the accounting period based on stock adjustment. |
| Accounting Sync | Stock Ledger and General Ledger stay automatically in sync. | Requires manual journal entries to align Stock and General Ledgers. |
| Accuracy | Highly accurate and up-to-date at all times. | Accuracy depends on manual adjustments; higher risk of discrepancies. |
| Effort & Maintenance | Low manual effort – ideal for businesses with frequent transactions. | High manual effort – suitable for small businesses with few transactions. |
| Error Risk | Low, since the system automatically handles postings and recalculations. | High, due to manual entries and potential delays in recording transactions. |
| System Dependency | Relies on ERP system automation (e.g., ERPNext). | Can be maintained even without automation, though less efficient. |
| Reporting | Real-time financial and stock reports available anytime. | Reports available only after manual reconciliation at period-end. |
| Inventory Valuation Timing | Continuous – valuation rate affects every transaction in real time. | Periodic – valuation done only during financial closing. |
| Ideal For | Medium to large businesses requiring real-time visibility and accurate reporting. | Small or traditional businesses with limited inventory activity. |
| ERPNext Setting | Home > Accounting > Company > Enable Perpetual Inventory | Home > Accounting > Company > Disable Perpetual Inventory |
| Example Transactions | Purchase Receipt → Delivery Note → Automatic COGS posting. | Purchases recorded as expenses → Manual stock valuation at period-end. |