Accounting for Inventory
Inventory accounting is the process of managing an organization’s inventory. Through this, the organization’s inventory information is accurately recorded, monitored and managed. Keeping accurate inventory records plays an important role in the business operations of an organization, as it helps in making the right production, sales and purchase decisions.
A warehouse management system (WMS) is a structured system that facilitates the collection, storage and distribution of goods. This method is mainly used in business establishments, where products need to be properly stored and delivered on time. Businesses can manage their inventory and supply chain more effectively and efficiently with this system.
Advantages
1. Time Saving: Product search and delivery can be done faster using inventory storage system. Automated systems make it easy to store and find products, which helps speed up business operations.
2. Inventory Control: Businesses can always be aware of their inventory by using the right warehousing system. If product quantity decreases or increases, the system automatically provides alerts, which helps in scheduling product re-orders.
3. Risk Reduction: Proper stocking method prevents product loss, theft or spoilage. Any chance of damage can be minimized by storing the products in the right place.
4. Increased efficiency: A good storage method reduces workload. This helps increase the efficiency of workers, as they are able to handle more products in less time.
5. Data Analysis: Modern inventory warehousing methods have the ability to analyze various types of data. It helps in business forecasting and gives clear idea about future demand.
Two methods are generally followed by the organization for maintaining inventory accounts
a) Perpetual Inventory Method
1. Perpetual method:
The stock quantity and price are updated immediately after each transaction happen in a perpetual system. That is, whenever a product is sold or purchased, those changes are recorded in the inventory records. In this method it is possible to update stock constantly using computerized system.
Example: If a store automatically reduces inventory at the time of each product sale, it is included in the perpetual system.
2. Periodic method:
Inventory is calculated periodically, such as monthly, quarterly, or once a year. Every fixed period is followed by valuation of stock and calculation of purchases and sales.
Example: If an organization prepares annual financial reports by calculating the number and value of inventory at the end of each year, this is an example of a compensatory method.
Storage method of inventory is a very important component for the success and sustainability of the business. If it is managed properly, businesses can improve their product management efficiently and effectively. In modern times this system is becoming more efficient and automated due to technological advancement, which has become essential for businesses to survive in the competitive market.