The value of available inventory is treated as an Asset in company's Chart of
Accounts. Depending on the type of items, it can be treated as Fixed Asset or
Current Asset. To prepare Balance Sheet, you should make the accounting
entries for those assets. There are generally two different methods of
accounting for inventory:

### **Auto / Perpetual Inventory**

In this process, for each stock transactions, the system posts relevant
accounting entries to sync stock balance and accounting balance. This is the
default setting in ERPNext for new accounts.

When you buy and receive items, those items are booked as the company’s assets
(stock-in-hand / fixed-assets). When you sell and deliver those items, an
expense (cost-of-goods-sold) equal to the buying cost of the items is booked.
General Ledger entries are made after every stock transaction. As a result,
the value as per Stock Ledger always remains same with the relevant account
balance. This improves accuracy of Balance Sheet and Profit and Loss
statement.

To check accounting entries for a particular stock transaction, please check
[examples]({{url_prefix}}/user/guides/stock/accounting-of-inventory-stock/perpetual-inventory.html)

#### **Advantages**

Perpetual Inventory system will make it easier for you to maintain accuracy of
company's asset and expense values. Stock balances will always be synced with
relevant account balances, so no more periodic manual entry has to be done to
balance them.

In case of new back-dated stock transactions or cancellation/amendment of an
existing transaction, all the future Stock Ledger entries and GL Entries will
be recalculated for all items of that transaction. The same is applicable if
any cost is added to the submitted Purchase Receipt, later through the Landed
Cost Wizard.

> Note: Perpetual Inventory totally depends upon the item valuation rate.
Hence, you have to be more careful entering valuation rate while making any
incoming stock transactions like Purchase Receipt, Material Receipt, or
Manufacturing / Repack.

* * *

### **Periodic Inventory**

In this method, accounting entries are manually created periodically, to sync
stock balance and relevant account balance. The system does not create
accounting entries automatically for assets, at the time of material purchases
or sales.

In an accounting period, when you buy and receive items, an expense is booked
in your accounting system. You sell and deliver some of these items.

At the end of an accounting period, the total value of items to be sold, need
to be booked as the company’s assets, often known as stock-in-hand.

The difference between the value of the items remaining to be sold and the
previous period’s stock-in-hand value can be positive or negative. If
positive, this value is removed from expenses (cost-of-goods-sold) and is
added to assets (stock-in-hand / fixed-assets). If negative, a reverse entry
is passed.

This complete process is called Periodic Inventory.

If you are an existing user using Periodic Inventory and want to use Perpetual
Inventory, you have to follow some steps to migrate. For details, check
[Migration From Periodic Inventory]({{url_prefix}}/user/guides/stock/accounting-of-inventory-stock/migrate-to-perpetual-inventory.html).

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