The Inventory Method in the System: Perpetual Inventory, Cost Calculation, and Physical Stocktaking and Settling Differences
This guide answers the question: What is the inventory method in the system? And can perpetual or periodic inventory be chosen? It explains how the system records inventory and the cost of sales in accounting, how the product’s cost is calculated, and how to carry out physical stocktaking (stocktaking sheets) and settle the differences.
The Short Answer
The system works with the perpetual inventory system by default and permanently, and you don’t need to enable or choose it; there is no setting to switch between perpetual and periodic inventory. Every movement on a product that has stock tracking enabled (purchase, sale, return, stock requisition, stocktaking) updates the quantity, the inventory value, and the cost of sales at the same moment, and the cost is calculated with the moving weighted average method.
The Difference Between Perpetual and Periodic Inventory
| Perpetual Inventory (Applied in the system) | Periodic Inventory | |
|---|---|---|
| When is the inventory balance updated? | With every purchase or sale operation | At the end of the period after the physical count only |
| When is the cost of sales recorded? | With every sales invoice | At the end of the period: opening inventory + purchases − closing inventory |
| Recording purchases | In the inventory account | In the purchases account |
| Knowing the profit and the balance | At any time and for each invoice | After the physical stocktaking only |
| The role of physical stocktaking | For verification and settling differences (shortage / surplus) | To determine the inventory and the cost of sales |
How Does Perpetual Inventory Work in the System?
1. Stock tracking is a basic condition
The system applies perpetual inventory to the products for which you enabled stock tracking from the product page. A product that isn’t tracked (and services) has no stock movements recorded, and its purchase is recorded directly in cost of sales as an expense.
2. The accounts used
| Account | Its Role |
|---|---|
| The warehouse account (an account for each warehouse by its name, under the stores) | The value of the stock in the warehouse. |
| Cost of Sales | The cost of goods sold, and stocktaking differences. |
| Purchases | An intermediary account when stock requisitions are enabled for purchase invoices or before receiving the goods. |
3. The entries the system creates automatically
| Operation | The Entry |
|---|---|
| Purchase invoice (tracked and received product) | Debit: the warehouse account / Credit: the supplier |
| A purchase invoice with stock requisitions enabled for purchase invoices | At the invoice: debit Purchases / credit the supplier. And when the addition requisition is accepted: debit the warehouse account / credit Purchases |
| Sales invoice | The sales entry: debit the client / credit Sales. And a separate cost entry: debit Cost of Sales / credit the warehouse account (at the average cost) |
| Sales return or credit note | Reversing the cost entry: debit the warehouse account / credit Cost of Sales |
| Purchase return | Credit the warehouse account at the average cost, and the difference from the purchase price is recorded in Cost of Sales |
| Manual addition / issue requisition | Debit / credit the warehouse account against the account you choose in the requisition (by default other credit parties for the addition and other debit parties for the issue) |
| Transfer between two warehouses | From the account of the warehouse transferred from to the account of the warehouse transferred to |
| Stocktaking reconciliation | Shortage: debit Cost of Sales / credit the warehouse account. Surplus: the opposite |
A practical example of perpetual inventory
1) Buying 10 units of a product at a price of 50 per unit (without tax):
| Account | Debit | Credit |
|---|---|---|
| The main warehouse account | 500 | — |
| The supplier | — | 500 |
2) Selling 4 units at a price of 80 per unit:
| Account | Debit | Credit |
|---|---|---|
| The client | 320 | — |
| Sales | — | 320 |
And at the same moment the cost entry (4 × 50):
| Account | Debit | Credit |
|---|---|---|
| Cost of Sales | 200 | — |
| The main warehouse account | — | 200 |
The result immediately: the balance is 6 units worth 300, and the invoice profit is 120, without waiting for the end of the period.
The Cost Calculation Method: Moving Weighted Average
The product’s cost is calculated with the weighted average method at the product level (across all warehouses together), and it changes with every purchase or addition operation:
Example
You have 6 units at an average of 50 (a value of 300), then you bought 4 units at a price of 60 (a value of 240): the new average = (300 + 240) ÷ 10 = 54. Any sale after that is charged at a cost of 54 per unit.
- Sales, issue, transfer, and stocktaking operations are priced at the current average and don’t change it.
- If you record an operation with a past date, the system recalculates the average and the cost entries for the later operations automatically (except invoices falling in a closed period).
- The First In, First Out (FIFO) method is not available.
Can the Periodic Inventory Method Be Used?
There is no setting for periodic inventory. The cases close to it:
- Products without stock tracking: their purchases are recorded directly as cost of sales and no stock balance appears for them, and this isn’t suitable for goods whose quantities need to be followed.
- In the point of sale: if Journal Entry per Invoice isn’t enabled, the session’s entries are recorded combined when it is closed instead of an entry for each invoice, but the inventory stays perpetual.
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Warning: it isn’t recommended to turn off stock tracking or disable the automatic entries of invoices to simulate periodic inventory; because you will lose the stock balances and the correct cost of sales.
Physical Stocktaking (Stocktaking Sheets)
Even with perpetual inventory, you need a periodic physical stocktaking (monthly or quarterly) to compare the quantities on the shelf with the quantities in the system, and settle the shortage or surplus resulting from damage, theft, or entry errors.
Workflow
1. Print the stocktaking sheet for counting → 2. Create a stocktaking sheet → 3. Add the products and enter the actual count → 4. Review the differences → 5. Reconcile → 6. Review the entry and the reports
Step 1: Print the count sheet (optional)
From the Stocktaking Sheet report, choose the warehouse and the category or the brand, and print the sheet: it contains the code, the name, the barcode, the count in the system, and an empty column for the quantity and the notes to use during the count.
Step 2: Create the stocktaking sheet
From Manage Stocktaking, click Add (a new stocktaking sheet), and choose the warehouse, the date, the time, and the notes, then save. The sheet is saved with the status Draft and moves to the Do Stocktaking screen.
Step 3: Add the products and enter the actual count
- Add Product: search by name or code or scan the barcode with the reader.
- Add All Products from the Warehouse: adds all the products that have movements in the warehouse.
- Import a CSV file with the columns: product, unit name, actual count, serial number, lot number, expiry date.
- For each product, enter the actual count, and choose the unit if you use multiple units (such as a carton), and a note and a picture can be added.
- For products tracked by serial number or lot number, enter the tracking data, and it must equal the quantity.
The system shows for each product the quantity in the system, the actual count, and the difference. You can filter by product, category, or count status (recorded / not recorded).
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Note: the quantity in the system is saved at the moment the product is added to the sheet. If sales or purchases happened during the stocktaking, use Update All or Update Uncounted to update it before reconciliation, and it is preferable to stop movement on the warehouse during the count.
Setting: Calculate the Stocktaking Quantity by Stocktaking Date
| Setting | Options (Default) | What It Does |
|---|---|---|
| Calculate the Stocktaking Quantity by Stocktaking Date | On / Off (Off) | When enabled, the quantity in the system is calculated up to the stocktaking sheet’s date. When disabled, all movements up to today are calculated regardless of the stocktaking date. Enable it if you record the stocktaking with a past date. |
The setting is found in Inventory & Products Settings in the stocktaking section.
Step 4: Reconciliation
After entering all the quantities, click Reconcile. The system automatically creates:
- An outgoing stocktaking sheet for the shortage products (the actual count is less than the system).
- An incoming stocktaking sheet for the surplus products.
- An accounting entry for the value of the differences at the average cost.
And the sheet becomes Reconciled.
An example of a reconciliation entry
The quantity in the system is 6 and the actual count is 5, and the average cost is 54: a shortage of one unit with a value of 54.
| Account | Debit | Credit |
|---|---|---|
| Cost of Sales | 54 | — |
| The main warehouse account | — | 54 |
If the actual count were 7 (a surplus of one unit), the entry would be reversed.
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Note: you can change the offsetting account for stocktaking differences (for example the “Stock Shortage and Surplus” account instead of Cost of Sales) from the entry settings of stock requisitions for the incoming and outgoing stocktaking sheet types.
Messages That Prevent Reconciliation
| Message | Cause |
|---|---|
| “Stock cannot be adjusted because the stocktaking doesn’t contain any items” | The sheet has no products. |
| “Stock products cannot be adjusted because some items don’t have the stock count” | There is a product without an actual count. |
| “You cannot add, edit, or delete a movement on this day %s, within a closed period” | The stocktaking date is in a closed period. |
| “You cannot add the transaction through a suspended warehouse” | The warehouse is suspended. |
| Quantity not available | The shortage is greater than the balance and negative stock is prevented. |
After the Reconciliation
- A reconciled sheet cannot be edited: “You cannot edit a stocktaking that has been reconciled.”
- To correct a mistake, use Undo Reconciliation: the stocktaking requisitions and their entries are deleted and the sheet returns to Draft, then edit and reconcile again.
- Deleting the sheet deletes its requisitions as well.
Reports
| Report | It Helps You With |
|---|---|
| Inventory Balances Summary | The balance of each product in each warehouse |
| Inventory Value | The inventory value at the average cost |
| Inventory Operations Summary / Inventory Operations | The incoming and outgoing movements during a period |
| Stock Movement Details per Product | All the movements of a specific product and its average cost |
| Inventory Turnover Rate | The speed of inventory turnover |
| Stocktaking Sheet | Printing the count sheet |
Permissions
Creating the stocktaking sheet and reconciling it require the permission to add a stock requisition, and editing and deleting require editing the stock requisition.
Frequently Asked Questions
- How do I make the inventory method in Daftra perpetual inventory? You don’t need any setting; Daftra works with perpetual inventory automatically. Just make sure stock tracking is enabled for the products.
- Can it be converted to periodic inventory? No, there is no setting for periodic inventory in Daftra.
- Can I use the FIFO method? No, the cost is calculated with the weighted average only.
- Why wasn’t the cost of sales recorded at the sale? Usually because stock tracking isn’t enabled for the product, or because the sale is from the point of sale and the entry is recorded combined when the session is closed.
- Why did the cost of an old invoice change? Because you recorded a purchase or addition operation with a past date, so the system recalculated the average cost and the cost entries.
- Is physical stocktaking necessary with perpetual inventory? Yes, to make sure the actual quantities match the system and to settle the shortage and surplus.
- Can the quantity in the system be hidden from the employee during the count? No, the quantity in the system always appears on the stocktaking screen.