Types of Online Inventory Accounting Management
Inventory are the items that are used by a business for the purpose of selling or for processing to sell or are used up in the production process. At the end of the day, it is by selling those inventories that business sustains. Therefore, they should be properly accounted. This can be done in a number of ways, four methods are commonly practiced: First In First out (FIFO), Last In First Out (LIFO), Weighted Average and Specific Identification. The last one is less popular than the other three.
Under FIFO, items are sold on the basis of their arrival; the earlier they arrive, the earlier they are sold. This will lead to the valuation of stock that reflects the cost of the latest arrivals. This proves useful when the market prices of the items are falling. It is also helpful in understanding and calculation than the second method.
In LIFO, the business sells the items that arrived last before the existing materials. This technique will result in a balance sheet that reflects a cost of the oldest items. Not only will this have more complications than FIFO, International Financial Reporting Standards (IFRS) has also banned it as it presents balance sheet that is outdated and in times of inflation – something that happens most of the times – gross profit under this method is understated. Moreover, the business may be in danger of losing older items to depreciation and obsolescence.
Weighted Average, as the name implies calculates the average cost of the inventories available for evaluation. Barring some decimal points that may result in calculation causing some complications, this method can be helpful in correcting any variation when using first or second methods. This technique can be used when the there are similar types of materials in stock.
Specific Identification is used when the items and their costs are unique and therefore cannot be aggregated. While this method gives an accurate picture of the stock, because it is difficult to keep track manually, accounting applications is advisable for this type of inventory management. Accounting applications can come handy in this method although all four typescan benefit by using apps.
What should be kept in mind is that consistency in the adoption of any one type should be ensured. International Accounting Standard prescribes that the best option is chosen so that it clearly reflects the periodic incomes.
LIFO method is prohibited for items that are interchangeable. Another legal standing is that for “items that are not ordinarily interchangeable and [for] goods or services produced and segregated for specific projects” specific identification inventory costing method should be used. While inventory valuation comprises of the all the costs to get the inventory items up sales it excludes the costs of selling and administration, including abnormal waste, storage costs, administrative and selling costs, and foreign exchange fluctuations.
This valuable information about online inventory accounting shared by Accment for accountant or non-accountant firm. Accment provides document management, Fuel inventory management and day journal applications too.