Inventory accounting is essential for ascertaining the sales of a business. Evaluating the inventory can play a significant role in your business as it maintains the cash flow, maximizes the profit, etc. Moreover, discover the accurate value of inventories with the help of inventories. Note that it also helps your business to reach proper conclusions.
3 Different Inventory Accounting Valuation Methods
It tracks the items in a business for resale. Rather than determining the value after every sale, it checks the periodic inventory counts after every year, three months, etc. Furthermore, implementing this accounting system is frequently simpler and more economical. Many small businesses which are having few employees can actively use this method of inventory valuation as they have moderate sales volumes.
2. Cost of Goods Sold (COGS) Inventory Method
The cost of goods sold (COGS) method includes all those direct sales that businesses use in the production process. Remember that it does not include indirect expenses such as sales, marketing, etc. It generally has three components for calculating it which are:
3. First In First Out (FIFO) Method
It works on the phenomenon of whichever goods are purchased or produced are sold first. This helps you to get rid of the old inventory by selling it out to the customers before the new stock arrives. Furthermore, it is the most suitable method for e-commerce brands selling time-constraint products. Due to this, you can record the most recent expenses on the balance sheet while deducting the oldest expenses.
Final Thoughts
Using various inventory accounting methods may seem simpler but without understanding them you cannot excel at it. Whether you’re implementing a periodic, COGS, or FIFO method, select them effectively to plan future decisions. So, make the best of inventory valuation and meet your business growth goals.
