Inventory

Inventory Accounting

Inventory always seemed like a huge undertaking for me, but learning about it actually became very straightforward and easy to understand.

I First started with the inventory I had on hand. No matter when I sell my product, the value of my inventory will remain constant based on different methods of inventory accounting.

Those methods are:

Weighted average

First in/First out

Last in/Last out

Weighted average – calculated the total cost of items in inventory that are available for sale divided by the total number of units available for sale. I always do this calculation at the end of my accounting period.

For example:

Seventy five pairs of shoes @ $20 each = $1,500

Thirty seven pairs of shoes @ $10 each = $ 370

Total number of shoes = 112

Average shoe cost = $1870 / 112 = $16.69

$16.69 is the average cost for each pair of shoes.

First in/First out – I was confused on this method until an accounting friend of mine explained it. FIFO is the abbreviation used in the accounting world. So, first in/ first out means that the first pair of shoes I put into inventory will the first ones sold. This is based on the principle that most businesses tend to sell the first set of goods that come into inventory.

Example: suppose I purchase five pair of shoes @ $10 a piece on March 17 and purchased another five @ $20 a piece on march 20. I then sold the first pairs of shoes on March 30. Using FIFO method, the five shoes I purchase @ $10 would be sold first. This left me with the five shoes purchased for $20 and now my inventory value reads $100.

Last in / First out - This method is referred to as LIFO. This method is based on the assumption that the most recent units purchased will be the first ones sold. The advantage of last in/first out accounting is that typically the last shoes purchased were at the highest price and that by considering the highest priced items to be sold first, a business is able to reduce its short-term profit, and hence, taxes.

Example: suppose I purchased five shoes @ $10 a piece on March 10 and five more @ $20 a piece on March 15. I then sell five shoes on April 12. The value of my inventory, using LIFO, would be $50, since the most recent pair of shoes purchased at a total value of $100 on March 10 and were sold on April 12. I was left with the five pairs of shoes valued at $10 each.

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Inventory – Build Raw Materials to Finished Goods

Simply Accounting Inventory Tutorial

The program I use in my bookkeeping office is Simply Accounting version 2010. My newest project is a manufacturing coffee company where they buy raw beans and roast to create a finish item. In the inventory module I have created codes for all the raw materials and finished good items. I have put a letter “C” in front of each finish good and letter ”Y” in front of each raw material. This is for reporting purposes.

Inventory and Service Records

Once all the inventory codes are entered start building the item assembly by clicking on the Build tab.

Inventory and Service Records Build

You are now building one 2300g (5lb) package of coffee. Two raw material itmes are being pulled at 2.5 lbs each to make a total of 5lb package. There will be one bag and one clear bag used for packaging. Lets look at the journal entry.

Notice the finished goods inventory asset account is being debited while the raw goods inventory asset account is being credited. Now you are ready to sell this item.