Continuous inventory management versus non-continuous inventory management
In SAP Business One, there are two options for inventory valuation The options are: continuous inventory management and non-continuous inventory management.
The continuous inventory management This reflects the value of inventory postings in the form of financial transactions in the financial accounting system. Such financial transactions are executed when items defined as stock items are added to or removed from inventory.
In continuous inventory management, inventory postings affect both the physical stock levels and the inventory value. Automatic journal entries are created in the general ledger to reflect changes in inventory value.
The second option is to use a non-continuous inventory management, In a non-continuous inventory system, sales, purchases, inventory, and production transactions automatically create inventory transactions that only affect inventory levels and not the inventory value. Transactions in a non-continuous inventory system do not generate direct, inventory-relevant financial postings in the general ledger. However, you can obtain an estimate of the inventory value using the various inventory reports.
Continuous inventory management must be activated before the first transaction is posted. After the first inventory transaction is posted, the option to choose between continuous and non-continuous inventory management is deactivated, and the selected setting can no longer be changed.
Continuous inventory management
Is the Continuous inventory management activated, Items can be valued using the FIFO, moving average, and standard price valuation methods. Valuation can take place at the company level, the warehouse level, or the batch/series level.
Continuous inventory management creates a Accounting for material costs according to the cause. Inventory transactions affect both the stock level and the inventory value. Automatic postings are created in the general ledger. Inventory level and inventory value are current, if the booking of goods receipt and incoming payment is made promptly.
Purchases of inventory-managed items are posted to an inventory account. The cost of materials is only posted when the items leave the warehouse and are delivered to customers or consumed in the production process. Simultaneously, the inventory account is debited, thus reducing it by the amount of items to be delivered or consumed. This can be triggered, for example, by delivery or the outgoing invoice (without the preceding delivery document), as well as by backflushing or manual removal during the production process.
Continuous inventory management requires a certain discipline in posting entries, as goods receipts and incoming invoices for items should be posted promptly according to the business model to ensure the items are used with the correct valuation in SAP Business One. If an incoming invoice is posted after the item has been sold and the purchase price differs from the price posted in the goods receipt, SAP Business One automatically posts a correction entry. From an accounting and valuation perspective, everything is correct. However, if this happens frequently, the complexity of the accounting system is increased by the additional postings, which can lengthen the time required to track the transactions. The same applies to negative inventory levels: these are possible, but not recommended, as they also increase the complexity of the postings and can make them more difficult to track.
- The number of stored items is known.
- The asset value is transparent.
- Material costs are booked according to the principle of causation.
- Negative balances are not recommended.
- Goods receipts and incoming invoices should be booked promptly in accordance with the business model.
Non-continuous inventory management
At the non-continuous inventory management While sales, purchases, inventory, and production transactions reflect inventory levels, they do not generate direct, inventory-relevant financial entries in the general ledger. Therefore, the inventory value of an item is not reassessed with each inventory release or receipt.
When purchasing stock-managed items, the goods receipt triggers a posting of the material cost. The material cost is therefore incurred at the time of purchase. With continuous inventory management, it is incurred at the time of delivery to the customer or consumption in the production process. The consequence of non-continuous inventory management is that the inventory value must be manually adjusted at specific intervals (monthly/quarterly/annually) via inventory change postings; only then is the correct inventory value reflected in the balance sheet.
- The number of stored items is always known.
- The inventory value is only correctly reflected in the balance sheet at the end of a period if inventory change entries have been made.
- Material costs only match the resulting inventory reductions at the end of the period.
- Negative balances are possible
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