Inventory is an asset for a company and therefore it also affects accounting in addition to the stock ledgerTraditionally, the effect of Inventory movement on Accounts has to be updated manually which is also known as Periodic Inventory System. The Periodic Inventory System is suited for smaller companies that maintain minimal Inventory. It is easier for smaller companies to do an inventory count periodically and estimate the Cost of Goods Sold during the interim periods. However, for larger companies, the Periodic Inventory system does not provide information regarding inventory value at hand in real-time.

With advanced software like ERPNext, one can automate this effect of Inventory movement on Accounts, which is known as the Perpetual Inventory System. Perpetual Inventory System provides information regarding Inventory and Cost of Goods Sold in real-time as each and every transaction is recorded as and when it happens. This makes it scalable for larger companies. However, since every inventory movement is reflected in Books of Account, any mistakes along the way can be difficult to rectify at a later period.

There are different methods by which the inventory is valued. There are two main types of inventory valuation methods supported by ERPNext. – Moving Average – FIFO: First in First Out

To summarize, the Inventory Accounting System defines how and when the effect of Inventory is reflected in the books of accounts and Inventory Valuation methods define how each individual inventory unit is valued.