Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
As humans do, manufactured goods have shelters, too. It’s called an inventory, and it comes in physical and digital forms. Undoubtedly, your company's inventory is one of the most significant aspects of your Edmonton business. It houses your source of income and keeps the business running.
It helps you know if there's enough stock or if you're running short of supply. However, inventory is more than just a shelter for goods. It's also a company asset, so it needs proper documentation. This documenting process is called inventory accounting.
If you can't handle your inventory properly, you become prone to order inaccuracies and, eventually, financial trouble. Before things get to this, you must learn the ropes of inventory management and accounting.
If you're not using bookkeeping services in Edmonton to manage your inventory, you will need to find some time in your schedule to dedicate specifically towards inventory accounting. First, let's discuss the basics and some useful tips for seamless inventory accounting.
Basics of Inventory Accounting
Before we get to the tips, let's have a quick overview of inventory accounting for a refresher.
Inventory Accounting Defined
Inventory accounting determines the cost value of inventory goods in certain production phases (raw, in-progress, and for sale). Thus, it accurately represents the company-wide value of all assets, which is important when evaluating the big picture of a business.
Increasing profit margins is another advantage. Generally, assets are important to determine and improve the company's value in the long run, and inventory accounting ensures you examine them carefully and accurately.
Reasons Why You Should Practice Proper Inventory Accounting
Generally, inventory accounting makes management easier and helps grow your business. Some of its specific benefits include (but are not limited to) the following:
- It makes financial management easier.
- It helps avoid time-consuming and laborious stock monitoring.
- It prevents overlooking small changes in supply or demand for products that can damage your business.
- It helps you maximize sales and prevent stockouts.
- It helps reduce storage costs.
- It minimizes the risks of product waste (damage or expiry) and theft.
- It gives you access to bulk discounts and other excellent deals.
- It helps you know your profitability status.
- It helps improve cash flow management.
Methods of Inventory Accounting
Inventory accounting has three common methods: First In/First Out (FIFO), Last In/First Out (LIFO), and Weighted Average Cost Method (AVCO). Here's how they work.
FIFO
FIFO is for a business that sells goods that come first in the inventory. You document the cost of a new item, document a sale, and dispose of them from the list. This method lets you see the profit margin changes over time.
LIFO
If FIFO focuses on the oldest items in your inventory, LIFO works on the newest/recent goods first. It involves the same process as FIFO: record the cost of an item that comes in, record the cost of sale, and eliminate it from the list. LIFO reduces income taxes because the sold goods are purchased at their highest price.
AVCO
AVCO calculates the total cost of inventory items for sale and the number of units bought or made at the start of the accounting period. Compared to the other two methods, AVCO is a simpler process. Hence, it leaves some important details that might not be ideal for big pricing fluctuations.
3 Inventory Bookkeeping and Accounting Tips for Seamless Financial Management
Inventory accounting is a vital aspect of bookkeeping for small businesses, but it can also be challenging. We want to share several key tips with you to secure your business financials and overall success as a company.
Take the Automated Path
Gone are the days of manual inventory management—times when you only used papers, clipboards, calculators, and ballpoint pens to keep up with managing and accounting. Now, inventory management software makes things easier, faster, and less prone to human errors.
When choosing the right software, look at the most important attributes. Ensure that it will make your work easier, faster, and consistently accurate. Most importantly, don't forget to run tests before making a decision.
Estimate Costs as Soon as Possible
Some of the costs that you might need can come from various sources with different submission dates. For example, landed costs (total cost of a landed shipment) come from suppliers, shipping providers, or customs brokers. Unfortunately, some of them can take days to weeks to send the bills.
It's challenging for an accountant, having to wait for pieces of information on irregular dates. Still, it's more practical to start estimating costs based on the available data. Previous charges may help for initial estimations, and the management software can update and recost them later.
Track Your Cost of Goods Sold (COGS)
Inventory accounting isn't just about the value of what's in stock. It also involves sold inventory, called the Cost of Goods Sold (COGS) or Cost of Sale. COGS is the sum of all costs a business needs to sell inventory. Accountants include COGS as part of their income statement reports.
COGS helps determine cash flow levels and profitability. You'll know how much you're currently making and how much you need to earn sales revenue. The simplest COGS formula that most businesses use for inventory accounting is: starting inventory + purchases during the accounting period - ending inventory.
Boost Inventory Efficiency With Unloop's Edmonton Bookkeeping Service
Inventory accounting can be overwhelming, especially for e-commerce businesses. You deal with a large-scale customer base, making inventory and financial management even more challenging. However, you don't have to deal with them on your own. If you need assistance, Unloop can help you with seamless bookkeeping and accounting tasks.
Is your bookkeeping service available in Edmonton? Do you offer small business bookkeeping in Edmonton? Yes! We offer bookkeeping services in Edmonton, Alberta, and other areas in Canada and the USA. We combine experts and technology to help you with your books, including inventory tracking, tax preparation, and COGS calculation. Work with us today.
Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.