Inventory Accounting

What Is Inventory Accounting?

Inventory accounting is the assemblage of accounting that arrangements with esteeming and accounting for changes in stocked assets. A company's inventory ordinarily includes goods in three stages of production: raw goods, in-progress goods, and completed goods that are ready available to be purchased. Inventory accounting will assign values to the things in every one of these three processes and record them as company assets. Assets are goods that will probably be of future value to the company, so they should be accurately valued for the company to have an exact valuation.

Inventory things at any of the three production stages can change in value. Changes in value can happen for a number of reasons including depreciation, decay, obsolescence, change in customer taste, increased demand, diminished market supply, etc. An accurate inventory accounting system will keep track of these changes to inventory goods at every one of the three production stages and change company asset values and the costs associated with the inventory likewise.

How Inventory Accounting Works

GAAP expects inventory to be appropriately represented by an exceptionally specific set of standards, to limit the capability of exaggerating profit by downplaying inventory value. Profit is revenue minus costs. Revenue is produced by selling inventory. On the off chance that the inventory value (or cost) is downplayed, the profit associated with the sale of the inventory might be exaggerated. That might possibly blow up the company's valuation.

The other thing the GAAP rules guard against is the potential for a company to exaggerate its value by exaggerating the value of inventory. Since inventory is an asset, it influences the overall value of the company. A company which is manufacturing or selling an obsolete thing could see a reduction in the value of its inventory. Except if this is accurately caught in the company financials, the value of the company's assets and accordingly the company itself may be swelled.

Advantages of Inventory Accounting

The primary advantage of inventory accounting is to have an accurate representation of the company's financial wellbeing. Notwithstanding, there are a few extra advantages to keeping track of the value of things through their separate production stages. To be specific, inventory accounting permits organizations to survey where they might have the option to increase profit edges on a product at a specific place in that product's cycle.

This should be visible most conspicuously in products that call for extraordinary investment or expense in secondary stages of production. Things like drugs, machinery, and technology are three products that require large measures of expense after their initial planning. By assessing the value of the product at a certain stage⁠ —, for example, clinical trials or transportation of the product⁠ — a company can change the variables at that stage to keep the product value something similar while expanding their profit edges by decreasing expenses.

Features

• This accounting method guarantees an accurate representation of the value, everything being equal, broad.
• Careful examination by a company of these values could lead to increased profit edges at each stage of the product.
• Inventory accounting decides the specific value of assets at certain stages in their development and production.