Tracking stock levels, costs and profit on every product you sell can get pretty complex – no wonder so many businesses have a fuzzy understanding of their inventory. But inventory accounting is too important to ignore.
Keeping track of your inventory, the time it takes to sell and the profit made on each product is essential if you want to manage your business effectively.
What is Inventory or Stock?
Inventory or Stock is the same thing – at NH+A, we use the term interchangeably.
Inventory is anything you buy to on-sell, including fully-completed items to sell in your store, products that you install in people’s homes or businesses or materials used to manufacture products.
Work equipment, tools or anything else used in your business don’t count as these are classified as an asset of your business.
If you have a drop-shipping business where third-party suppliers ship direct to your customers, you don’t have inventory either. As you do not hold the stock, and you did not purchase the stock to then on sell to your customer.
Accounting for inventory
Tracking the movement and value of your inventory is essential for pricing, insurance, accurate tax returns and selling your business.
Good inventory tracking can also help you:
- Manage stock levels – order more popular items and fewer slow-moving products
- Identify profitable items and true margins
- Find bulk discounts on popular items
- Boost marketing by identifying sales trends.
It all adds up to less waste and better cash flow – which means more money for business-building activities.
Start accounting for inventory now
To manage your inventory effectively, you need to track how many units you have, how much it costs and how much you’re selling it for. You also need to factor in discounts, transport and storage costs, damage and write-offs. It can get pretty complex – so you might want to get help from people who have done it all before.
Regularly (such as monthly and especially year-end), you need to do a physical stock take and compare this to what is recorded on your accounting system as stock on hand. Any variances may indicate stock shrinkage such as loss of inventory to employee theft, shoplifting, admin error, vendor fraud (fraud schemes that manipulate a business’ accounts payable and payment systems for illegal personal gain), damage or cashier error.
Want to build a better understanding of your inventory? Get expert help from our accounting team.
