Inventory Accounting – A Free Video Guide for Accountants & Advisors
Welcome to the Unleashed Inventory Accounting Guide – a free video series demonstrating practical inventory management and inventory accounting methods.
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.
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.
In this video we 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 the video above 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
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