There are two basic ways to handle inventory in your bookkeeping. Both can produce a correct year-end result, but they paint very different pictures during the year — and they place different demands on setup and discipline.
This article explains the two methods, shows what happens in the accounts, and goes through the pros and cons so you can make a deliberate choice. CRS' clear recommendation is given at the end.
The two methods differ on four points:
Inventory movements (receipts/issues): Method 1 → on inventory accounts in the balance sheet. Method 2 → directly in operations (P&L).
Cost of goods sold: Method 1 → posted in operations when you sell. Method 2 → not used on an ongoing basis.
Operating result: Method 1 → sales − cost of goods = real gross margin. Method 2 → sales − purchases, with no regard for the inventory movement.
Inventory value in the accounts: Method 1 → updated continuously. Method 2 → usually unchanged until a stock count.
Here inventory is kept as an asset on the balance sheet, and the cost hits operations when the item is sold — not when it is purchased.
When you buy:
Debit: Inventory account (balance sheet — an asset)
Credit: Accounts payable / bank
The goods are recorded as value in inventory on the balance sheet. The purchase is not yet an expense.
When you sell:
The sale: Credit sales (P&L), Debit customer / bank
Cost of goods: Debit cost of goods (P&L), Credit inventory account (balance sheet)
In other words, the cost price is moved from inventory (the balance sheet) into cost of goods (operations) as you sell. In Sapera this happens automatically through automatic inventory posting — see Setting up automatic inventory posting.
The operating result therefore becomes *sales minus cost of goods* = a real gross margin, and the balance sheet shows the real inventory value on an ongoing basis.
Real gross margin all year. You can see earnings month by month without counting inventory first.
Correct period allocation. The cost hits the same period as the matching sale (the matching principle).
The result does not swing with your purchasing pattern. A large purchase just before month-end does not ruin the month's result — it sits in inventory, not in operations.
A true balance sheet. The inventory value in the accounts can be reconciled against the inventory module's stock value — see Inventory value compared to posted.
Better control. Interim accounts, budget follow-up and contribution margins stay reliable all year.
Requires correct cost prices on the items for cost of goods to be right.
More setup. Inventory accounts, cost-of-goods accounts and automatic inventory posting must be configured.
Differences must be handled. Differences between physical and posted stock (shrinkage, errors, price changes) must be settled through stock adjustment/counting.
Here purchases are posted directly as an expense in operations, and inventory is generally left untouched during the year.
When you buy:
Debit: Purchases (P&L)
Credit: Accounts payable / bank
When you sell:
Credit sales (P&L), Debit customer / bank
No cost price is moved to the balance sheet. The operating result therefore becomes *sales minus purchases*, with no real regard for whether inventory rose or fell during the period.
For the annual accounts to still be correct, inventory must be counted at year-end, and the movement (closing inventory minus opening inventory) is adjusted in with a single manual entry — typically by the accountant. Without this adjustment the result is not accurate.
Simple. No setup of inventory accounts or automatic inventory posting.
Fewer postings and easy to understand — works fine for smaller businesses with limited stock.
Less dependent on cost prices in day-to-day operations.
Misleading result during the year. The result swings with *when* you buy — not with *what* you sell. A month with a large purchase looks bad even if sales are unchanged.
No real gross margin until inventory is counted and adjusted — in practice often only once a year.
The balance sheet is not accurate during the year. Inventory usually shows the opening value all year.
Harder control. Interim accounts and budget follow-up become unreliable.
Requires a manual stock adjustment at year-end to land a correct annual result.
Same month, same figures — shown in both methods. Assume:
Opening inventory: DKK 0.
Purchases in January: 100 units at DKK 60 = DKK 6,000.
Sales in January: 40 units at DKK 100 = DKK 4,000 (cost price 40 × 60 = DKK 2,400).
Closing inventory: 60 units at DKK 60 = DKK 3,600.
Method 1 — inventory on the balance sheet, cost of goods in operations:
Operations: Sales 4,000 − Cost of goods 2,400 = gross margin DKK 1,600.
Balance sheet: Inventory DKK 3,600.
Accurate: you earned DKK 1,600 on what you actually sold, and the DKK 3,600 you bought but have not yet sold sits as value in inventory.
Method 2 — purchases directly in operations:
Operations: Sales 4,000 − Purchases 6,000 = DKK −2,000 (a loss!)
Balance sheet: Inventory DKK 0 (untouched)
Misleading: the month looks like a DKK 2,000 loss, even though you actually earned DKK 1,600. The DKK 3,600 difference is exactly the inventory you have bought but not yet sold.
At year-end (method 2) the accountant corrects the picture with a single stock adjustment: inventory is raised to the closing value of DKK 3,600 (an asset on the balance sheet), and the same amount is credited to purchases/cost of goods in operations. Only then does the annual result become the correct DKK 1,600 — but all year up to that adjustment the accounts showed a misleading loss.
That is the heart of the difference: method 1 is accurate at all times; method 2 only becomes accurate after a manual adjustment.
CRS recommends method 1: inventory movements on the balance sheet and cost of goods in operations. It is the only one of the two methods that gives an ongoing, accurate picture of both earnings (gross margin in operations) and assets (inventory value on the balance sheet), and it makes full use of Sapera's automatic inventory posting.
Method 2 can be defensible for a smaller business with small, stable stock, where the accountant makes the stock adjustment at year-end — but it costs you the ongoing overview for the rest of the year.
Choose the method together with your accountant. Switching method mid-year should always be coordinated with your accountant so that inventory and result are not counted twice.
Automatic inventory posting (method 1) is set up via the inventory journal — see Setting up automatic inventory posting.
Cost of goods as a concept and recalculation: see Cost of goods.
Track the inventory value via Inventory value and reconcile against the accounts with Inventory value compared to posted.
