Inventory accounting is the body of accounting that deals with valuing and accounting for variations in inventoried resources. A company’s inventory generally consists of goods in three stages of production: raw goods, in-progress goods and finished goods that are prepared for sale. Inventory accounting will allocate values to the items in each of these three methods and record them as company assets. Assets are goods that will probably be of future value to the organization. Assets need to be perfectly valued so the company can be accurately valued.

Christine Ross Hooksett New Hampshire is accomplished, solutions-driven specialized with 15+ years’ success in economic analysis and audit, serving as trusted resource and advisor for executive management teams. Inventory accounting is the body of accounting that deals with pricing up and accounting for changes in inventoried resources. A company’s inventory typically includes goods in three stages of production: raw goods, in-progress goods and finished goods that are prepared for sale. Inventory accounting will assign values to the items in every single of these three procedures and record them as organization assets. Assets are goods that will likely be of future value to the company. Assets need to be perfectly valued so the company can be accurately valued. Inventory items at any of the three production stages can change in cost. Changes in value can occur for a variety of reasons including depreciation, deterioration, obsolescence, change in consumer taste, increased demand, and decreased market supply and so on. An appropriate inventory accounting system will keep track of these changes to inventory goods at all three production levels and adjust company asset values and the costs connected with the inventory accordingly.

Christine Ross Hooksett New Hampshire

How Inventory Accounting Works:

The simple formula for calculating the price of goods sold during a period is the sum of your starting inventory and your purchases minus your ending inventory, which means you need to perfectly determine the value of your ending inventory with an appropriate inventory accounting method. Thus, inventory accounting is an essential business practice for manufacturers, wholesalers, and retailers. A lot of these product-based businesses face the challenges of assigning a value to inventory on hand as opposed to inventory sold since similar goods carry distinct prices as time goes by. However, companies are required to commit to an inventory cost method in the first year of the company, and while it’s possible to switch techniques in later years, doing so can be extremely complex. Therefore, organizations should carefully weigh inventory accounting strategies to determine which method is most suitable for the organization not only today but as the company (and the amount of inventory managed) grows. There is more than one inventory accounting approach to use to value inventory.

Types of Inventory Accounting:

Accountants require determining whether to use initially in, first out (FIFO), last in, first out (LIFO), weighted ordinary method, or specific recognition method of inventory accounting. If older inventory is less costly, and you use it first, you would choose the FIFO accounting technique. Or, you could assume that you used the most recent, most pricey inventory using the LIFO accounting method.

If FIFO and LIFO will not operate for your business for one reason or another, your other alternatives include the weighted average method or the specific recognition method. The weighted average method of inventory accounting uses the regular cost of your total inventory to assign a value to each item used, while the particular identification method includes tracking the cost of each inventory item independently and charging the specific cost of a product to the cost of goods sold.

Carry on reading to learn more about each type of inventory accounting.

FIFO Inventory Accounting Method:

When employing the FIFO method, accountants presume the items purchased or manufactured first are utilized or sold first, so the items outstanding in stock are the latest ones. The FIFO technique aligns with inventory movement in many organizations, which makes it a frequent choice. Price ranges also rise each year, so accountants who believe the earliest items are the first utilized can charge the least costly units to the cost of goods sold first. As a result, the cost of goods trends lower and leads to a higher quantity of operation earnings and more taxes to pay. It also indicates that companies use the oldest items first and don’t have to fear about expiration dates or inventory that does not move.

LIFO Inventory Accounting Method:

Christine Ross Hooksett New Hampshire says that the Accountants who opt for the LIFO strategy assume items purchased or manufactured last are sold first, so the items outstanding in stock are the earliest. As such, this approach does not a calculator for accounting follow most companies’ natural inventory flow and is suspended by International Financial Reporting Standards. When costs rise, the last units bought are the first used, so the cost of goods trend higher and results in a lower amount of operating profits and fewer income taxes to pay. Businesses using the LIFO method also struggle with obsolete inventory.

Weighted Average Accounting Method:

Companies choosing for the weighted average method have just one inventory layer. They also roll the price of new inventory purchases into the cost of present inventory to figure out a new weighted average cost that is readjusted as more inventory is purchased or manufactured.

Specific Identification Method:

The specific identification method needs companies to monitor the cost of each inventory piece separately and charge the specific cost of an item to the cost of goods sold when you sell the particular item. Because this inventory accounting method demands a great deal of data tracking, it is best suited to high-cost items.

Select an inventory accounting method that suited for your business needs to maximize revenue potential while successfully managing record-keeping for tax purposes.