Let’s discuss how to effectively keep track of inventory and cost of goods sold from an accounting perspective, covering everything from inventory classification to inventory valuation methods.
Inventory management is a crucial aspect of accounting and bookkeeping, especially for businesses that hold physical goods. It involves keeping track of the quantity and value of goods that a business has in stock, as well as managing the flow of goods into and out of the business.
The first step in keeping track of inventory and cost of goods sold is to properly classify the inventory. This involves grouping similar items together, and determining whether the items are raw materials, work-in-progress, or finished goods. This classification is important for determining the cost of goods sold, as well as for managing the inventory effectively.
Inventory Valuation Methods
Once the inventory is properly classified, the next step is to determine the value of the inventory. There are several inventory valuation methods that businesses can use, including:
First-In, First-Out (FIFO)
This method assumes that the oldest items in inventory are sold first, and that the cost of the oldest items is matched with the revenue generated from the sale. This method is generally considered to be the most accurate and is commonly used in the retail industry.
Last-In, First-Out (LIFO)
This method assumes that the newest items in inventory are sold first, and that the cost of the newest items is matched with the revenue generated from the sale. This method can be useful in inflationary environments as it results in a lower cost of goods sold and higher taxable income. However, it’s not widely accepted and not allowed in some countries.
This method calculates the average cost of all the items in inventory, and uses this average cost to determine the cost of goods sold. This method is easy to calculate and is commonly used in smaller businesses.
Keeping Track of Inventory and Cost of Goods Sold
Once the inventory is properly classified and valued, the next step is to keep track of the inventory and cost of goods sold. This can be done by regularly conducting physical inventory counts, and by keeping accurate records of all inventory transactions.
A good inventory management system can help to automate this process and provide real-time updates on inventory levels and cost of goods sold. This can also include features such as reordering points, stock levels, and tracking of inventory movements.
Managing Inventory Flow
In addition to keeping track of inventory and cost of goods sold, it’s also important to manage the flow of goods into and out of the business. This can be done by implementing inventory control procedures, such as setting reorder points and minimum stock levels, which can help to ensure that inventory is not overstocked or out of stock.
In addition, businesses can also consider implementing a Just-In-Time (JIT) inventory management system, which aims to minimize inventory levels by ordering goods as they are needed, rather than keeping large amounts of inventory on hand.
Keeping track of inventory and cost of goods sold is an essential aspect of accounting and bookkeeping for businesses that hold physical goods. By properly classifying and valuing inventory, keeping accurate records, managing inventory flow, and implementing an effective inventory management system, businesses can effectively manage their inventory and ensure the accuracy of their financial statements. With the right approach and the right tools, businesses can also improve their efficiency, reduce costs, and improve their bottom line.
NimbleFincorp can integrate with accounting software to automatically update inventory and cost of goods sold information, ensuring that the data is accurate and up-to-date. The system also allows to set re-order alerts, enabling businesses to keep track of stock levels and minimize stockouts. Furthermore, it also includes tools to track inventory and cost of goods sold across multiple locations, which can help businesses manage their inventory more efficiently.
With these features, NimbleFincorp can help businesses make better decisions about inventory management and cost control, which can ultimately result in increased profitability.