Accounting Of Inventory Stock
The worth of accessible inventory is recognized as a Current Asset within the company’s Chart of Accounts. To compile a Balance Sheet, it is essential to record the accounting entries for these assets. Typically, there are two distinct methods of inventory accounting.
1. Auto/Perpetual Inventory
In this procedure, the system automatically generates pertinent accounting entries for each stock transaction to synchronize stock balance with accounting balance. This setting is the default configuration in BizCentric for new accounts, with Perpetual Inventory enabled by default in the company.
When items are purchased and received, they are recorded as assets of the company (stock-in-hand). Conversely, when items are sold and delivered, an expense equivalent to the landed cost of the items, known as Cost of Goods Sold, is recorded. General Ledger entries are generated following each stock transaction, ensuring consistency between the value in the Stock Ledger and the corresponding account balance. This enhances the accuracy of the Balance Sheet and the Profit and Loss statement.
Read Perpetual Inventory documentation to check accounting entries for a particular stock transaction.
1.2 Advantages of Perpetual Inventory
The Perpetual Inventory system simplifies the task of maintaining the accuracy of the company’s asset and expense values. Stock balances are consistently synchronized with relevant account balances, eliminating the need for periodic manual entries to reconcile them.
In the event of new back-dated stock transactions or the cancellation/amendment of an existing transaction, all future Stock Ledger entries and General Ledger (GL) Entries for all items associated with that transaction will be recalculated. This also applies if any costs are subsequently added to the submitted Purchase Receipt through the Landed Cost Voucher.
Note: Perpetual Inventory completely depends upon the item valuation rate. Hence, you have to be more careful entering the valuation rate while making any incoming stock transactions like Purchase Receipt, Material Receipt, or Manufacturing/Repack.
2. Periodic Inventory
In this approach, manual creation of accounting entries is required to synchronize stock balance with relevant account balances. The system does not automatically generate accounting entries for assets during material purchases or sales.
During an accounting period, expenses are recorded in the accounting system when items are purchased and received. Subsequently, some of these items are sold and delivered.
At the close of an accounting period, the total value of items intended for sale must be recorded as the company’s assets, often referred to as stock-in-hand.
The variance between the value of the remaining items for sale and the stock-in-hand value from the previous period can be either positive or negative. If positive, this value is deducted from expenses (Cost of Goods Sold) and added to assets (stock-in-hand). Conversely, if negative, a reverse entry is made.
This entire process is known as Periodic Inventory.
Existing users who utilize Periodic Inventory and wish to transition to Perpetual Inventory must follow a series of steps to migrate.