Let’s keep it simple from the scratch – this article is going to confabulate with Inventory Accounting. Are you aware of this? If not then this article is going to be very beneficial for you. Make sure to read the complete article as I’m going to start from scratch. But before that let me give you a spoiler alert here – every business will have some kind of inventory that becomes a company’s assets. To manage that asset, every company has to utilize Inventory Accounting to determine company’s inventory asset.
Inventory accounting is critical to business process that makes direct impact on profit and taxation.
Let’s now start from scratch.
What inventory accounting is (IA)?
Simply putting, inventory accounting is a way to check the value of assets at certain stages in their development and production. A company’s inventory basically consists of good in three stages of production, which include raw goods, in-progress goods, and finished goods that are ready for sale. So IA here will assign value to the items in each of these three processes and them as company assets. Make sure the inventory is properly recorded so that you have precise value of company’s assets.
Let’s move on to understand…
How does inventory accounting work?
Inventory accounting works by adopting the method where you will be calculating the cost of goods sold (beginning inventory) and minus out the purchases of ending inventory. That means you need to determine the value of ending inventory with an appropriate IA method.
Having said that, inventory accounting is crucial for business practice for manufacturers, wholesalers, and retailers as well. However, the problem comes with product-based businesses that have to face challenges in assigning value to inventory on hand as opposed to inventory sold. Based on the company’s requirement, you have to choose the best inventory method possible that will rightly value your inventory.
So what these inventory methods are? Let’s talk about them in the next section below.
Different types of Inventory Accounting at a glance –
#FIFO Inventory Accounting
FIFA stands for First in, First out. When using this method, accountants must assume the items, which are purchased and sold first. This method works by inventory management in many companies that make a common choice. With this method, companies must use oldest items first and don’t need to worry about expiration date or inventory that don’t even more.
#LIFO Inventory Accounting
Last in, First out is the method which is exact opposite of FIFO IA. This method helps you assumes the most recent purchased goods, which are first purchased and sold. What you need to do is to apply the most recent purchase price to the amount of inventory that exceeds the previous purchase quantity. By adding two together, you procure a current valuation for the inventory. Most accounting firm providing virtual accounting services in Phoenix also use this method for their inventory management.
#Specific Identification Method
As the term suggests, this method enables companies to track the cost of each inventory particularly. The companies separate each item and determine the cost when you sell them to clients. Let me tell you that this type of accounting method requires special deal of data tracking. Moreover, it is best suited for high-cost items.
#Weighted Average Accounting Method
This is the last method of inventory accounting. This method covers the one inventory layer. Moreover, you can also roll the cost of new inventory purchases into the cost of existing inventory purchases to determine a new weighted average cost that is readjusted more inventory is purchased or manufactured.
The final wordings
Now we have come to the end of this article. In this article, you have read about concept of IA, how it works, and type of it. So it’s a high time to choose the best inventory accounting method that you find suitable for business needs to maximize revenue potential while effectively managing record-keeping for tax purposes.
For any accounting or bookkeeping needs, Kayabooks is here to help you with that. So make sure to get in touch with us right away.