Accounting for inventory refers to the act of noting down and keeping track of the purchases that happened as a part of your business. The items you intend to sell away are most likely in the inventory. You need to list everything you have in stock and keep track of all the new purchases you make for the shop.
It means that you keep track of all the money spent on the items you put on the shelves. A business owner needs to stay ahead of the trends and keep their shop laced with whatever the market is raging about; this would mean going out of your way to procure stock for the customers to enjoy.
Now, you may be thinking, here we are rambling on and on about accounting for inventory without explaining how you can go about it.
Let us quickly go over how you could set up an accounting system for your inventory.
How to Set Up an Accounting System for Inventory?
There are two ways to have an accounting system for your inventory. Business owners have used both methods for years and worked flawlessly despite varying aspects. You can look at the breakdown of both below and decide which would work better for your budding business.
Periodic inventory accounting
Periodic inventory accounting caters to your inventory accounting needs through a systematically divided pattern. As the name suggests, the accounting of your inventory should happen periodically.
The business owner does not account for each sale individually during this method. Instead, they focus on getting their digits together at the end of a season. It allows a seasoned business owner to compare their monthly results with the previous month to realize where they may be lacking.
Cost of sales inventory accounting
Unlike periodic inventory accounting, cost of sales inventory accounting deals with the calculations for each sale made in the inventory. A more short-term-focused ideology often helps business owners stay ahead in their accounting game.
The Profit and loss report plays a huge role in this type of inventory accounting. With every sale, the equation of assets on the balance sheet is disrupted but accordingly increases on the profit & loss report.
Why is Accounting for Inventory Important?
New business owners often fail to understand that the inventory they have set up for the business is one of their greatest assets. Whatever you spend is noted as an asset in the accounting books.
It means that the inventory’s value equates to some part of the asset value that the company is enjoying. The more you spend on your inventory, the higher the worth goes. Knowing the value of your stock would allow you to understand its worth.
This asset value on the balance sheet signifies how much wealth has been invested in the business. When you purchase your inventory, you are technically growing the asset value of your business.
Maintaining a journal for your accounting system would help you compare your sales to your inventory, which could play a defining role in analyzing the profit or loss your company has faced.
Conclusion
After discussing the hows and whys of inventory accounting, we hope you have received a rough idea of what it is, how it could benefit your business, and how you could go about it.
Always remember: the first step to being a successful business owner is to have your accounting system neatly set. If the bookkeeping, profit & loss reports, balance sheets, income statements, and accounting statements are in shambles, believe me when I say, very soon, your business will be in chaos, too.
Make sure to pay attention to your inventory to calculate the asset value of your business.
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