Inventory accounting – how you should be handling inventory

Onboarding a new client can be one of the trickiest parts of the accounting process if they have a large or complex inventory. Cataloguing these items is vital, but doing so can be a logistical nightmare. 

Luckily, there are ways to simplify this process. Here’s why inventory accounting matters, and how we can help you to do it better. 

What is inventory?

As you are sure to know, inventory is just another word for stock. That is to say, items that a client has bought with the intention of selling for profit. 

This can mean complete products, or parts that will be used to manufacture a new product. It does not include items such as equipment or machinery that the client has purchased to help them run their business. These are considered expenses rather than inventory. 

How to explain inventory accounting to your clients

You might need to explain to your clients that inventory is an asset, and therefore must be taken into account when valuing a company. Inventory accounting means going through every item in a business’s inventory and assigning it an accurate value. 

Unless you’re relatively new to inventory accounting, you’ll know it’s not a one-off job. Stock can go out of date, get damaged, or simply lose its value due to market fluctuations. 

Of course, it could rise in price too, based on commodity prices, for instance. A good inventory accounting system will keep track of these changes and alter the company’s balance sheet accordingly. 

Ensuring your clients understand the importance of inventory accounting

Taking a thorough approach to inventory accounting gives you a much clearer idea of the present and future state of a client’s business. It’s helpful if clients understand the advantages that this can bring to them:

• You can see which of your client’s products are selling the quickest and advise them to order or manufacture more of these. Ordering popular items in bulk may allow your client to take advantage of discounted rates from suppliers. 
• You can save your client money on storage costs by advising them to order fewer of the products that aren’t selling. 
• You may spot sales trends which your client can use to form the basis of seasonal advertising campaigns.
• Putting an accurate value on inventory will make it easier for you to complete your client’s tax return. You may also be able to help them to time their orders in a way that reduces their tax bill. 

What can I do to make it easier? 

Inventory accounting is a two-way street. Your client needs to do their bit by keeping accurate and up to date records, while you need to be diligent about logging these records along with their other financial information. 

No matter how careful you and they are, though, mistakes may happen. Many businesses operate on tight profit margins, so even a small discrepancy in inventory records can cause serious problems. This is where we can help. 

Inventory management software can automatically track stock levels, storage costs, shipping costs and market prices. This saves businesses the laborious task of logging inventory information, and allows them to set prices, adjust orders and project future profits with complete confidence. 

Such systems can also spot emerging sales patterns, allowing you to give your client the best possible advice. 

Capium’s bookkeeping software includes specialist features for inventory accounting, which integrate seamlessly with our full suite of accounting and practice management software. 

Get in touch today to arrange a demonstration and see how it could help you and your clients.