Inventory Accounting

What is Inventory Accounting?

Answered July 28 2019

Inventory accounting is the segment of accounting that tracks the value of current inventory items, as well as the changes that occur when new items arrive or raw materials are consumed. If your business manages inventory, you need to account for all of the moving pieces across the company’s computerized system. Part of keeping track of your inventory is knowing what you have and how much it is worth at any given point in time.

Let’s take a look at the principles of inventory accounting and the different systems that companies and businesses use today.

Inventory Accounting Basics

Because inventory is a business asset, company accountants must use a logical and consistent method to assign a value to the inventory. This directly impacts the expense of the cost of goods and the amount of income received.

Most product-based businesses must pick a system and stick with it in order to keep their inventory accounting manageable. However, the first system chosen is often not the best choice as the company grows and evolves. That’s when knowing what your options are before you make the choice comes into play.

Different System Options

The most basic inventory accounting methods are first-in-first-out and last-in-first-out, commonly known as FIFO and LIFO, respectively. They are the most established systems and are fairly self-explanatory. While these are good, solid systems, the fact is that your inventory and  restocking systems may not be as simple as that.

Instead, the  weighted average method and specific identification methods may be better choices. Weighted average methods continually adjust the weighted average cost as new product comes in and out. This might be better for companies that deal with higher fluctuations in product costs. Specific identification methods track each item separately from start to finish and may be better for businesses that deal with high-value products.

All of these inventory accounting systems are viable options, but your needs will dictate which is your best option.

Tip: Keep in mind that while a system may not make much sense in the earlier phases of your business, it’s worth taking a second look at the principles of inventory accounting and your alternative options before deciding on a system for the long run.

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