Inventory Accounting – A Free Video Guide for Accountants & Advisors
Welcome to the Certified Advisor Programme – a free video guide to inventory management and inventory accounting.
Presented by accountant Will McTavish, it introduces the fundamentals of inventory accounting to financial professionals – including external advisors, accountants and mentors serving product businesses – as well as the internal staff at product firms.
In this inventory accounting video guide
What is inventory accounting?
Inventory accounting is the practice of valuing and reporting on the physical inventory a business holds. It’s a critical role, with products and components often accounting for the greatest capital outlay in a business.
Inventory accounting involves both the day-to-day management of the Accounts Payable, Accounts Receivable and Cost of Goods accounts – but also the periodic reporting that’s so important for things like taking out the right levels of insurance, paying taxes and duties, and even valuing a firm for purchase or sale.
Inventory accounting and business strategy
Inventory accounting also has a strategic function. Key inventory metrics – including the inventory turnover ratio, supplier lead times, the landed cost of goods sold, and profit margin by SKU – are all used to guide the overall strategy of an effective product business.
A strong grasp of the fundamentals of inventory management is therefore critical for financial professionals within those product-based companies – and for business advisors with manufacturing, wholesale or retail clients.
Who is this guide for?
In preparing these videos we had two distinct audiences in mind: internal staff and external advisors.
What internal accounting staff will learn
For those involved in the day-to-day functioning of their business – raising purchase orders, dispatching invoices, actioning sales orders, and processing payments – the videos below will showcase the kind of functionality inventory software brings to these tasks.
You’ll get to grips with the role played by different departments as they make, manage or move your products – and see how these activities are reflected in your financial position.
You’ll also see how software turns each of these separate steps into parts of a single unified process that can be viewed, analysed and reported on accurately at any time.
Next steps to take
If you have more questions about what you’ve seen here – or you’re interested in trying Unleashed – the logical next step will be to book a call with one of our inventory management experts.
Otherwise you can simply trial the software for two weeks, obligation-free and with no credit card details required – by signing up here.
Ready to try the software? Start your free 14-day Unleashed trial now. All features included. No credit card needed. Sign up now
What accountants and advisors will learn
The videos here will give you a detailed understanding of how inventory management software works in a product business. You’ll learn how perpetual accounting is reflected on the balance sheet – and discover the kind of insights available to advisors who have a strong grasp of inventory software, its functions and its benefits.
Next steps to take
Unleashed doesn’t pay commissions for referrals from advisors. However, we do run a global Partner Programme to support those who:
- Offer app advisory services to their clients (or want to start)
- Offer accounting-plus business advisory packages
- Have clients ready to move on to cloud inventory software and want to refer them to a trusted partner
If any of the above apply, you can register for the Unleashed Partner Programme (and refer your clients) here.
Periodic vs perpetual inventory systems
Let’s look at the difference between perpetual and periodic inventory management methods in inventory accounting, and how journaling works within each
With a periodic system you make a journal entry on a periodic basis to update your balance sheet to match your stock on hand.
With a perpetual system, when you purchase stock you recognise that on the balance sheet as stock on hand, and only recognise the expense on the Profit and Loss account when you sell your stock. So there are more journals on a perpetual system.
That’s why paper-based systems tend to only use periodic inventory accounting, whereas with inventory accounting software that admin load isn’t an issue, and you can value your inventory on a perpetual basis to get a much more accurate reflection of your position on the Profit and Loss account and the balance sheet.
Let’s look at what a periodic stock journal looks like compared to a perpetual stock journal, and how they relate to the Profit and Loss account.
Inventory costing methods explained
Here we look at the Lifo, Fifo and Weighted Average Cost methods – and the pros and cons of each
In inventory accounting we need to choose a method of costing our inventory.
With the Lifo method not accepted under the Generally Accepted Accounting Practices (GAAP) or the International Financial Reporting Standards (IFRS), we’re left to choose between the Fifo and Weighted Average methods.
Let’s look at the pros and cons of each in terms of accuracy, margin reporting and the admin time required.
Understanding purchase orders in inventory accounting
The simple purchase order becomes more than just a document
In an inventory management software context, a purchase order is more than just a static administrative document. Purchase orders become key functional apparatus – a launching pad from which you can access supplier pricing, interrogate margins, view stock on hand and much more.
In this video we look at:
- Raising a purchase order
- Recording landed costs such as freight and duties
- Accounting for freight within the Weighted Average Cost accounting method
- Completing a purchase order vs receipting a purchase order and leaving it open
- Split receipting & how backorders work in inventory management
Managing products with inventory management software
Gaining full visibility over a company’s products transforms how the business is run
Products are the heart of a business. A good inventory management system shows you exactly what each product is, where it is, and what it costs.
Accountants and advisors are concerned with knowing the cost of each item – and understanding how those values map across to the accounting system. While staff in other departments are more interested in product management features like batch and serial tracking, warehouse bin locations, and the ability to set minimum stock levels that prevent costly and disruptive stock outs.
We demonstrate how all of these inventory management features work, and also touch on:
- Accessing transaction records by product, category or brand
- The difference between component products vs assembled products
- Allocating stock for production, allocating stock to a sales order, and tracking aged stock
- Assigning supplier and purchase price data to products
- Assigning sales price data for products, including quantity-based pricing and price tiers for different customers
- What is SKU? A complete guide to Stock Keeping Units
- Serial number tracking: Everything you need to know
Inventory management and manufacturing
Understanding Bills of Materials, assemblies and production costs
It’s important to understand how a perpetual inventory system assigns value to individual products – both those you buy, and those you make.
In this video we look at:
- How a bill of materials works
- Calculating the value of waste during production – and why tracking waste is important for accurate inventory accounting
- How COGS works in manufacturing – knowing your cost of production under the Weighted Average Cost method
Accounting for contract manufacturing
A look at supplier costs and the value of products
How does inventory accounting work for contract manufacturing? We look at how to ensure you capitalise the cost of services like external manufacturing – and other supplier costs – into the value of final products, thereby ensuring you maintain an accurate view over product margins.
We also explain inventory management practices such as:
- Auto assembly – selling packs of items that are put together after they’re sold
- Disassembly – buying products in bulk and breaking them down into separate units for individual sale
Performance measures for inventory management
Inventory management metrics and how to access them
Accurate information is the basis of good financial management and advisory practice. And with inventory so important to the performance of product companies, finance managers and advisors alike must have ready access to inventory data.
In this video we show you how to quickly and easily access and interpret live inventory information. We dive in to some of the inventory management performance measures you should be across, and touch on:
- Analysing the value of open purchase orders
- Using Business Intelligence to explore sales revenue and stock on hand values
- Interrogating revenue by sales channel
- Using annual stock turns as an inventory accounting metric
- Using Business Intelligence tools within an advisory coaching package