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The Basics of Inventory Accounting
Managing inventory efficiently is a critical for e-commerce businesses as inventory costs affect long-term profitability, sustainability and viability. You must know how to budget and forecast demand, inventory value, the SKU’s you have.
What is inventory accounting?
Fundamentally, inventory accounting is the body of accounting that deals with valuing and accounting for changes in inventoried assets. Changes in inventory value can occur due to multiple factors, i.e. how much product you have, how much you are selling, changes in supplier pricing for additional inventory. Factors also include damaged or expired products.
Calculating Inventory Value
- FIFO (First In, First Out)
The first product that is received from your manufacturer will be the first to be sold and shipped. This keeps a smooth chain of inventory without allowing items to become too aged, since as new supplies of the items come in, they are set to the back of the sales queue.
- LIFO (Last in, last out)
The most recently purchased units are the ones that are sold and shipped out first. Specifically, if recent inventory purchase costs have been higher due to inflation for instance, selling the most recent inventory items first can be beneficial for the business and decrease the book value of their inventory.
- Specific Identification Method
This method involves tracking individual inventory items all the way to sale. When the item is sold, the selling price is matched to the cost. This is the most accurate method.
- Weighted Average
Using an Average or Weighted Cost method, the cost of goods are averaged, making it a simpler, however less accurate, method of valuation.
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