Inventory accounting is an important aspect of accounting for e-commerce businesses. Since inventory is considered an asset that you may be buying, selling, and storing continuously throughout the year, and it can fluctuate in value, having a good inventory accounting system in place is crucial. Monitor inventory throughout the year, starting with the inventory you have at the beginning of the year. This is also referred to as “inventory on hand.” Inventory needs to be checked throughout the year, and also checked at the end of the year. Inventory is a key part of calculating the cost of goods sold, which is required to file taxes.
What Is Considered In Inventory?
It is important to know what is considered inventory. Inventory usually refers to the goods that are physically held by the company. This could be in the form of merchandise the company is in the process of selling, raw materials used for manufacturing, and work in progress. Usually when we think of inventory we think of a company that is selling goods to others. However, if you are selling services, the materials you use would also be considered inventory. For example: if you own a hair salon, you are selling your services. The shampoo, conditioner, and hair dye would be considered inventory.
Accounting For Changes In Inventory Assets
When it comes to inventory accounting, change is inevitable. If a company purchases goods to sell from a distributor, the price of the goods could change over the course of the year. Monitoring this change is important for several reasons.
- The cost of goods has a direct impact on your profit. If you end up paying more for merchandise, you may want to adjust the amount you sell your goods for.
- Changes in inventory could affect the way you monitor your inventory. There are several different methods you can use for inventory accounting. What works best for you will depend on your inventory.
What Are The Methods Of Inventory Control
There are several different methods businesses can use in inventory accounting. Which one works best will depend on the nature of the business and the inventory.
- First In First Out (FIFO) – First in first out is exactly what it sounds like. Older merchandise is moved before newer merchandise. This means that inventory that is being stored is the newest. Many
businesses have adopted this method, as it is good for shelf life. This method tends to procure a lower cost of goods sold, because as prices rise, the oldest goods that were purchased at a lower price are sold first.
- Last In Last Out (LILO) – Last in last out is exactly the opposite of first in first out. In this method the newest merchandise is being sold first. This creates a higher cost of goods sold, which can result in lower income earning and lower income taxes. With this method, there could be more inventory layers, since the oldest merchandise is in stock for longer.
- Weighted Average – The weighted average approach takes an average of all of the merchandise in stock. This average is usually calculated at the end of an accounting period.
It is important to keep accurate records for your inventory. Failure to do so could make for a more challenging tax year, not to mention inaccurate filings, which could result in penalties. Avoid expensive tax mistakes and hire a professional. A professional tax specialist can help you with your inventory accounting, which can make tax season a whole lot easier. To learn more contact us today!
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