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Just because a company sells items to customers on a typical day of business doesn’t necessarily mean it needs to track its inventory. The main types of businesses where it is important to track inventory are manufacturers, wholesale distributors, and retailers. In these businesses, it is essential to track the quantity and value of inventory because inventory is considered a part of a company’s assets.
There are key pieces of information needed when tracking inventory. Most accounting software programs manage serial numbers.
You need to know:
- Manufacturer’s Part Number
To properly manage your company’s inventory, you need to create the following inventory accounts.
- Inventory Asset: Inventory is considered a current asset, easily liquidated. When inventory is purchased, this is not an expense. It is considered an asset and is posted as an inventory asset. The amount entered is the total of the vendor’s bill. If your company has a sales tax license, make sure you aren’t paying sales tax for any items purchased for resale.
- Cost of Goods Sold (COGS): This is an expense account. The value of the inventory asset is based on its cost, not on its resale value. When a product is sold, the expense is posted and the value of the inventory asset is decreased by the same amount. The value of your inventory asset account is reduced when you post the cost of the item to COGS which increases your expenses. In addition, you post income.
- Inventory Adjustments: Establish this as either an expense account or a COGS account. You will use this account to adjust for a discrepancy between the inventory quantity on hand and the quantity noted in your accounting records. An adjustment may also be required for damaged goods or for crediting a customer for a returned product.