Inventory Accounting is Not as Difficult as You Think

If you think inventory accounting is too hard, it’s time to rethink, refresh, retool, and restart. With a quick refresher of basic inventory accounting concepts, openness to new approaches, and inventory accounting software designed to guide you through the process, it’s much easier. 

Rethink

Why do you dread inventory accounting? Can you change negative thoughts into positive ones?

The first step is considering the importance of adequately accounting for inventory in your business. Next, visualize your business results with excellent inventory accounting. It’s a goal worth pursuing. 

Your business invests a significant amount in inventory. Controlling that inventory is essential to avoid unplanned inventory shrinkage (through loss, damage, theft, and obsolescence) and have inventory available for customer sales when needed. Having the right kind and amount of inventory items available builds sales. 

Refresh 

To rebuild your confidence, take a few minutes to refresh your inventory accounting basics. They’re in your head already. You learned them in Accounting 101 (Basic Bookkeeping). 

To refresh your accounting basics check out this guide by HubSpot - and you'll learn more about Sales Metrics and KPI's, take a look at Business Accounting Basics, refresh your Business Accounting Terms, and regain ground in accounting for small business.

Furthermore, in this guide, you'll download all the assets you need to get you started. 

Inventory Definition in Accounting and T accounts

Remember that course where you used T accounts to learn how to record accounting transactions with balancing debits and credits (double-entry accounting)? That’s when you or your fellow students may have been wondering, which of the following is not an inventory account? Now you know the simple answer to what is inventory in accounting? Inventory includes parts (and labor and overhead for a manufacturer) and merchandise items that will be sold to customers.

Inventory is classified as a current asset in accounting.

Cash, investments, accounts receivable, and inventory is current assets because they usually turn over in less than twelve months. Prepaids like insurance, if applicable to a time within twelve months, are also considered current assets. An asset is a resource held by the company. 

The company owns a merchandise inventory. The original purchaser owns consignment inventory until it is resold to a customer through a company that sells consignment goods. Therefore, consignment inventory accounting is different than merchandise inventory accounting. Manufacturers keep track of raw materials, work-in-process, and finished goods inventory.

The following inventory T account shows two entries related to accounting for inventory purchases and accounting for inventory sales. (T accounts for cash, accounts payable, and accounts receivable are not shown):

(ZarMoney Needs to Draw Vertical Line Down Center of T account from Top Horizontal Line to make it a T account)

Inventory T Account

To record inventory items received on credit terms.

To record the cost of goods related to the sale of inventory.   

When you record transactions, you may want to specify the type of inventory account included in your chart of accounts. An example is the Merchandise Inventory account. 

Merchandise inventory is the cost of goods on hand and available for sale at any given time. It is a current asset with a normal debit balance. To determine the cost of goods sold in any accounting period, management needs inventory information.

Inventory Accounting Methods

The primary inventory accounting methods are FIFO (first in/first out)  and LIFO (last in/last out). You choose the method and consistently apply it to record inventory transactions from year to year.

Inventory Accounting Systems

The two main inventory accounting systems are perpetual and periodic. A perpetual inventory system keeps a running total of transactions to track inventory. A periodic inventory accounting system includes physical counts, including a full physical inventory near the fiscal or calendar year-end used by the business and also small sample physical counts of selected inventory items throughout the year.

To follow up with the physical inventory counts, reconcile physical inventory counts of specific items to inventory items recorded in the books as perpetual inventory transactions. Some differences may relate to the cutoff date of items received and shipped before and after the physical inventory date that have not been recorded yet. 

Other Inventory Accounting Considerations

Inventory is recorded at the lower of cost or Net Realizable Value (NRV) less reasonable cost of sale or disposal, according to Generally Accepted Accounting Principles (GAAP). Inventory is also reviewed for slow-moving items and obsolescence to determine whether a reserve or write-off is required to fairly value the inventory in the financial statements. 

Retool

You’ve been struggling too long if you think that accounting for inventory has to be difficult. Accounting for inventory can be simple with the right inventory accounting software. ZarMoney is a leading-edge inventory accounting software that's designed to serve your needs in the best possible way. 

ZarMoney lets you set up custom fields for inventory items. You can group inventory items by brand and product line. Manage inventory at multiple locations and warehouses, including transfers to various locations.

With ZarMoney, you can choose your inventory method as FIFO or another method that fits your business. The menu is set up intuitively with an excellent user interface. You can order additional inventory when needed for a specific customer order. You can check the status of inventory items and orders, including backorders. Use Item Genie to track inventory items. You can split transactions of ordered inventory to record items as they are received. That means you’ll only have to pay for inventory items as they are received, not the entire invoice. You’ll be in control of inventory; it won’t control you. 

Check out the full list of ZarMoney features.

Restart

Once you start using ZarMoney accounting software, you’ll know that inventory accounting isn’t as difficult as you thought. You’ve reviewed inventory accounting basics. You’re now ready to restart the inventory accounting process with a renewed sense of confidence and the right tools to help you achieve your desired business goals.