Keeping track of your inventory is another way to track your current assets (things that you own that you can easily use or liquidate). In the inventory account, you keep track of the products you have purchased for sale. As you sell products, you deduct the cost of each item sold from the inventory account. This account allows you to easily track the products still available for sale.
Although periodic physical counts of inventory are time-consuming, it is necessary to compare your actual inventory with what is recorded on paper. If inventory isn’t accurately accounted for a business’ profits are negatively impacted. Inventory losses can be written off due to theft or damage but accurate documentation of those losses are needed.
Companies may choose to track their inventory in one of two ways. Tracking inventory helps detect carelessness, lost items and theft.
Periodic Inventory Method:
Requires a physical count on a periodic basis. This could be daily, monthly or yearly depending on the type of business. The cost of goods is calculated using the items-sold number.
Perpetual Inventory Method:
Calculated based on actual transactions. A computerized inventory control system is required to use this method. Major retailers often link their cash register sales to their inventory control system.