When it comes to accounting and inventory, there are many things to be aware of in order to ensure that you are doing everything the right way.
An accountant can certainly help you with this, but it helps to learn a little bit about how it works so you are familiar with the process come tax time.
Inventory is basically anything a company buys with the intention of selling to a customer. Think about Amazon’s huge warehouse of products. That is their inventory, all of which they intend to sell to their customers.
Over time a company should figure out the ideal amount of inventory to have on hand. If it’s too high, that means product isn’t being sold and it might add to a company’s expenses to keep it on hand for an extended period of time.
If inventory is too low, the company might not be able to meet consumer demand and potentially miss additional income opportunities.
Let’s take an auto shop for example. If the company buys a tire for $100, and it costs $10 for it to be trucked over to the auto shop, they would list that tire on their inventory sheet at $110.
That tire remains as inventory until it is sold to a customer, at which point it is no longer considered inventory and moves to the Cost of Goods Sold section.
Let’s take a look at example inventory accounting entries:
Inventory at December 31, 2014:
Total Goods Available for sale:
Less Inventory December 31, 2015:
20 tires at $110 per tire
Cost of Goods Sold:
So in this simplified example of accounting and inventory, you can see that the auto shop started off the year with 5 sets of tires costing a total of $2200. So they had $2200 worth of inventory on hand. At the end of the year, they sold all of the tires except for one set.
The $440 remains on their inventory sheet, and the $1760 moves to the Cost of Goods Sold section.
Note: if you need to track inventory in your business...unless you are extremely small and only have a very small inventory to track...you need a good accounting software to track your inventory and products sold such as QuickBooks.
QuickBooks does a great job of tracking your current inventory. It will enable you to discern with the click of a button, how much inventory you have on hand at any given point and how much that inventory is worth. It will also let you know which items are on order and when you can expect to receive those items.
QuickBooks will also keep track of the cost to make products you assemble yourself and the income you generate from selling them.
Inventory accounting can be done in two ways: periodic or perpetual.
Periodic means inventory is updated just once a year.
Perpetual means inventory is constantly updated as new products are purchased.
Depending on which method you choose, there are many different ways to estimate and record your inventory. Your accountant will be familiar with all of them and help you decide which is the best method for you.
Also, to avoid any unpleasant surprises come tax time, consult your tax adviser a couple times a year (especially towards the end of your tax year) regarding your accounting and inventory.
So those are the basic ins and outs of accounting and inventory. It’s very important that you keep on top of inventory to make sure you have enough on hand to meet the needs of your customers, but not too much that you’re left with a warehouse full of unsold goods.