Inventory Accounting – Definition, Types & Working

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|Updated on: July 20, 2022

What is inventory accounting?

Inventory accounting is nothing but a process of valuing and keeping a track of for any changes in the inventories. Goods are categorised into three stages: raw goods, in-progress goods, and finished goods that are ready for sale. Inventory accounting method allows business owners to assign values to the items in each of these three processes and record them as company assets. These accurately valued inventories will further help strengthen a business’ working capital.

Check out the different types of inventory management systems:

Types of inventory accounting

Inventory needs to be managed as per your business requirements. While there are several ways, in which a business management software can help you manage your inventory levels, it is significant that you analyse your needs well in advance and choose a method that is best suited for your business. Below are some of the best inventory accounting methods to keep your stocks levels at a optimum:

ABC analysis

Here, the stock is divided into three sections namely A, B and C. A section consist of inventories that are high in value with low sales frequency or consumption. This category of stocks requires to be controlled closely. Category B consists of stocks that are of moderate value and with decent sales frequency. In category C, you have inventories with low value having high sales frequency requiring minimum inventory control.

Just in time (JIT)

Here, the company maintains an inventory level that is required during production. Under this method, you will not be having any excess inventory beyond the production requirements and it helps you get rid of the cost involved in storing excess stock.  Here, the order of stock is placed when old stock is close to zero and this puts production in risk, even if there are small delays.

Economic order quantity (EOQ)

In this EOQ method, the company will get to know how much quantity of inventory should the company order at any point of time and when should they place the order considering the minimum level of inventory.

Fast, slow, and non-moving (FSN)

Here, the inventories are classified based on the movement. All the inventories are categorized as fast-moving, slow-moving, and non-moving. Basis the movement across the categories, the order is placed.

What are some of the most crucial inventory accounting reports?

Inventory valuation will help you manage your inventory levels in the best way possible. With an automated business management software, you can easily keep a track of your inventory accurately. Here are some of the most crucial inventory accounting reports:

Flexible units of measure

Handling real-time complexities like ‘the requirement to buy in one unit and sell in another’, ‘Stock Items required to be quantified in more than one unit’, ‘measuring the unit of stock item with floating conversions’ etc. are some of the most crucial aspects in any organisation that need to be handled carefully and accurately.

Re-order level

Using reorder level technique, you can ensure that you never run out of stocks and in real-time get to know the stock which must be replenished along with right quantities. You can set re-order level and Minimum order level and automatically generate re-order status report along with shortfall and quantities to be ordered.

Multiple stock valuation

This inventory accounting method helps you value your closing stock using different stock valuation methods. The flexible stock valuation method allows you to set different stock valuation method for each item based on your requirement.  TallyPrime supports the following stock valuation Methods:

  • Average Cost
  • FIFO
  • FIFO Perpetual
  • Last Purchase Cost
  • LIFO Annual
  • LIFO Perpetual
  • Cost
  • Monthly Avg. Cost
  • At Zero Cost

Watch Video on Multiple Stock Valuation methods in TallyPrime

Manufacture and expiry date management

Manufacture and expiry date management is crucial for business dealing with products having defined shelf life or short durability. Tracking inventory based on their shelf life, will allow business owners to keep a constant check on expired products, and refrain from selling it to the customer and getting into their bad books. TallyPrime’s batch summary report, you can maintain batches with manufacturing and expiry dates and get complete visibility of batch details such mfg date, expiry date, no of days till expiry etc.

Want to optimise your inventory? Here are the steps to improve inventory process:

How does inventory accounting work?

Inventories are usually the largest current asset of a business and it holds huge working capital of the business. The way you manage the inventory has a direct impact on the profitability and the financials of the business. One of the key aspects associated with managing stock is inventory valuation.

If the inventories are not properly measured, expenses and revenues cannot be properly matched, and a company could make poor business decisions. Inventory valuation is a process to determine the cost associated with an entity's inventory at the end of a reporting period. To simplify, it is all about driving the value of the stock which are unsold for a given period, usually on the date of preparing financial statements.

No matter what type of inventory you hold – Raw materials, WIP goods or Finished goods, all of these should be valued at the end of the reporting period. You will be in a position to know the business profitability only when you to determine the cost of goods by way of stock valuation.

Inventory valuation is carried out considering the valuation guidelines and methods as prescribed in the accounting standard.

Want to know more about inventory valuation? Read here:

Advantages of inventory accounting

Sound management and tracking of your inventory will help business owners have an accurate representation of the company’s overall financial health. It will give you a clear picture of stock-in-hand, expired goods, cost of goods sold (COGS), etc, which will ultimately result in optimum levels of inventory. Based on the stage of inventory production, you can easily assess which stock will generate the maximum profit margin for your business.

A few other additional advantages of inventory accounting are:

  • To determine the current value of the unsold stock
  • Derive the cost of goods sold
  • To know the accurate profitability
  • The stock statement with values is one of the important collaterals for getting approval for bank loans.
  • Helps in the projection of future revenues and aids in business decisions.

Check out insightful inventory reports that TallyPrime offers you

Read more about Inventory

Best Inventory Management Software for Businesses in India, Inventory Management, Inventory Management Techniques

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