The Background And Role Of Inventory In Accounting
Accounting is a vast discipline, and includes many concepts that constitute or contribute to its various fields. In order for someone to specialize in the subject, it is imperative that they understand all of these in an in-depth manner, and memorize the most essential ones. In this article, we will concentrate on the concept of inventory in accounting, and elaborate on its background and role within the discipline.
So what exactly is inventory in accounting? It is an asset that can have a certain cost attributed to it. Usually, inventory is meant to be sold in a short period of time, which is why it is termed as a short-term asset in accounting. Generally speaking, accounting can be classified within three broad categories when it comes to accounting practices, which are discussed below.
Raw materials constitute inventory that is meant for the production of goods
Goods that are between the production process, and cannot be sold to customers since they aren’t in their finished form
Finished goods that are fit for sale right away, and are know as merchandise as well
As any form of inventory is considered to be an asset, accountants must assign costs to it an appropriate manner. Also, it might also be possible that same goods in your stock have different value owing to price changes. Hence, you must come up with a suitable method for inventory costing. Usually, there are three different methods to do this, all of which are described below.
Specific identification method
Using this method, you can assign costs to different items in your stock depending upon their individual value. This requires you to keep a track of large amounts of data, and is suitable if you are dealing with goods of high value.
First In First Out Method
According to this method, business owners set their price by assuming that the items that have been sold before others made it to their inventory earlier. As a consequence, this also means that remaining stock contains items that have been purchased recently.
Last In First Out Method
As per this method, the price of goods is set assuming that the ones that have been sold were latest to be bought. As a consequence, this means that the remaining inventory contains older goods.
Weighted Average Method
Using the weighted average method, a price is set for the goods keeping in mind their individual values. As a consequence, this price keeps changing whenever newer goods are added to the stock.
No matter which method you choose, it is important that you keep in mind its pros and cons before making the decision. Most companies use the First In First Out method, which is easier to manage. However, if you need more information on this, then you can hire our experts who will gladly help you out in every aspect. This is because they have a lot of experience in the field, and have dealt with numerous such clients in the past. So what are you waiting for? Sign up now!