Smart accounting isn’t just about keeping the books and tracking the funds that are coming in or going out. On the contrary, a key part of accounting is monitoring your business’s assets—and not just your fixed assets. While long-term assets—such as property or equipment—are undoubtedly important to factor into your accounting, it’s just as important to pay attention to short-term assets.
One of the essential short-term assets for a company to track through accounting is product inventory. Failing to account for changes in inventory can lead to unexpected stock shortages, backorders, and poor customer service, among other problems. The question is: how can you devise a smart inventory accounting strategy to avoid these common pitfalls?
Classifying Inventory Assets
Before we delve into strategies you can use to improve your inventory accounting procedures, let’s talk a bit about how assets are tracked through accounting paperwork in the first place. For financial reporting purposes, you would list inventory items under the assets portion of your company balance sheet. However, the accounting rules for these inventory assets differ from the rules you would follow for other types of tangible or intangible assets.
Inventory is unique. On the one hand, you would consider it a “current asset,” or an asset you will liquidate for cash in a year or less. Inventory assets, however, are neither the most liquid asset on your balance sheet nor the least liquid. Accounts receivable, for instance, is more liquid than inventory: it will be converted to cash sooner. Property or long-term investments, on the other hand, are significantly less liquid than inventory. For companies that manufacture and sell their own inventory, the matter is complicated further by the fact that inventory can be classified in three ways: raw materials inventory, work-in-process inventory, and finished goods inventory.
All these factors sometimes confuse businesses about how to classify inventory goods on a balance sheet. In some cases, inventory items can even be company liabilities, such as if a company has too much inventory to sell/store, or if consumer tastes changes. In these cases, inventory items might be classified as either short-term or long-term liabilities.
Using ZarMoney for Inventory Accounting
At ZarMoney, we are aware of how challenging it can be to account for an inventory in a way that seems logical, consistent, and in harmony with the rest of your accounting strategy. For these reasons, we include a feature for tracking inventory as part of our accounting software. Not only does this tool make it easier to know where your inventory is and what it’s doing, but it also helps you track changes in that can later be reported as part of your income statement or cash flow statement.
Features of our inventory tracking tool include:
- Cross-warehouse management: If you have multiple warehouses or shipping facilities, this feature can help you keep track of inventory counts and purchase histories specific to each location.
- Item Genie: Use this feature to track inventory on hand or see sales trends. The latter capability helps you avoid overstocks, which keeps inventory items from becoming long-term debt.
- Split transactions: If you only receive a partial purchase order, you can use this feature to split the transactions to reflect on your accounts payable accurately.
Other perks include easy conversions for units of measurement, easy inventory/purchase order comparisons, tracking for inventory transfers between warehouses, and more.
Try ZarMoney to Simplify Your Inventory Management and Accounting
Inventory accounting—from tracking items in stock to keeping an accurate record of what you’ve sold—can factor into every other aspect of your accounting, from cash flow insights to retained earnings calculations. Using ZarMoney, you can simplify the entire process. Try the software for free today.