Inventory accounting is crucial for retailers. On-hand inventory is sometimes misunderstood as stuff that has not yet been sold. However, it should be recognized as a company asset and managed as such legally. Inventory accounting is simply the act of appropriately valuing a corporate asset so that it may be reported correctly in end-of-year financial records in this regard. Even VAT (tax) laws require every taxpayer to have books of accounts and inventories. Accounting services in Dubai can help businesses effectively account for inventories.
This article discusses the essential parts of inventory accounting following accepted accounting standards. Take a look forward.
What is Inventory Accounting, and why is it important?
Inventory accounting may assist you in determining how much inventory you have, how much it costs you, and how much it is worth to your company. It will help you decide whether or not your company is working at its best.
Working process of Inventory Accounting: Different Approaches
A cost and an asset are recorded when you purchase an inventory item. Because it can be sold, it is an asset. It is reported as income when you sell the item. It’s also gone from your asset list.
It isn’t the sole method of inventory management. Other approaches might be more appropriate for your company. One option is to keep track of your inventory as an asset when you acquire it and only record the cost (along with the profit) when you sell it.
It’s challenging to keep track of what you spend on products when prices constantly change. Accountants have two options for overcoming this.
1. The method of calculating the Weighted Average Cost (AVCO)
You may use the average cost per item for each product line. You may estimate the worth of your inventory by multiplying the average cost by the number of goods you have. Although AVCO is a simple approach, it lacks important information and does not operate well with large price variations.
2. First in, first-out (FIFO)
First in, first-out (FIFO) is a standard inventory management approach that assists businesses in adequately managing their warehouse goods. FIFO, on the other hand, works well for valuing unsold stock. We presume that the first inventory acquired will also be the first inventory sold in this approach. It indicates that an order will be fulfilled using the oldest available inventory.
For cost flow assumptions, the FIFO approach is employed. The related expenses of a product must be recorded as an expense as it progresses through further development phases and when final inventory items are sold in production. Under FIFO, the cost of goods acquired first is considered to be recognized first. Because inventory has been withdrawn from the company’s ownership, the dollar worth of total inventory drops during this process. The inventory costs may be computed in a variety of methods, one of which is the FIFO approach.
3. Inventory Tracking
Inventories tracking refers to the process of a company regularly monitoring all of its inventory. Raw materials, unfinished commodities, and ready-to-sell things are the most popular inventory definitions. Most major corporations have whole departments dedicated to inventory management and tracking. Furthermore, smaller businesses often invest a significant effort in inventory tracking. Inventory monitoring is crucial to businesses of all kinds and can be summarized in a single word: money. Companies spend a lot of money on inventory, and the majority of them want to know where that product is at all times.
What is Stocktaking?
Stocktaking is a method of double-checking your financial records’ data. It is done by physically counting each item of inventory you have on hand.
Compare that figure to the information on your balance sheet. It’s not frequently that it’ll match up. In most cases, there will be less in actuality than on paper. It’s thought that the lost merchandise was either destroyed and abandoned or stolen.
What is the significance of stocktaking?
Before completing your business tax return, you may be required to do a stocktake. Aside from that, it’s a great tool to double-check and fix your financial figures.
How may Farahat & Co. assist you?
This article should have provided entrepreneurs with a fair understanding of the best inventory accounting methods. However, for merchants, this might still be a complicated process. When it comes to preparing financial records and filing tax returns, we strongly advise using the services of the top accounting companies in Dubai, such as Farahat & Co.
We have a staff of highly qualified accountants that will make sure that the inventory accounting system of the company runs smoothly, is simple to use, and is reliable. We will assist you with critical tasks such as planning and forecasting and assuring that your accounting records are kept correctly and following UAE legislation. Please take advantage of our accounting services in Dubai to achieve speedier success.