The higher the complexity of this reporting, the higher skilled accountant team, is a good general rule. You will need to be more meticulous and exacting to ensure it is not just a pretty report, but an accurate one. One major benefit is the balance sheet presentation can look really nice drilled way down, but there can be more mistakes with more variables at play. Complexity Factor 1 How Many Accounts to HaveĪ good first question to ask yourself in deciding how many accounts to have is, how detailed do you want to be on your balance sheet? Would you like one big inventory account or many accounts? If you are dealing with a ton of variables in getting the raw materials to become the final product, (i.e, a complex supply chain), it may make sense to keep track of all of the tiny factors affecting your margins along the way. We have narrowed it down to a few basic areas that can affect your decision on how intricate your accounting should be. Some may choose to keep it very simple, having one inventory asset account and basic COGS accounts for labor, freight-in, etc., and some may want to get farther into the weeds. It also provides you with an easy way to access all of the complex data and change it as needed. You can read all about the inner workings of the Inventory Workbook here.īy having all of this data centralized in the Inventory Workbook, it provides you with a foundation from which to decide how complex you want to get when it comes to inventory accounting. This displays the variables in one place and is dynamic and interactive, so that you can adjust for any changes in cost, revenue and production process notes on the micro level to see the effects throughout the product life cycle. To ensure the best chance at getting to know the true numbers and understanding the ins and outs, is to analyze the supply chain and have a central document that records the process and numbers behind each product - this is where the Inventory Workbook comes in. How to Keep Track of the Data - Simple to Complex That’s why it is important to account for these items properly. Assessing these important items means we can accurately address areas to ensure the company is making the most of their products on both the cost and the revenue side. As your outsourced accounting firm, we want to not only ensure we are properly accounting for your inventory from raw material to finished goods, but understanding the true data so we can analyze and understand your margins. That is a lot of accountant-ey sounding terminology already, we know. Now it turns into an expense as it is applied to a cost of goods sold account. The value of the inventory is in its potential sale. You are buying/creating an asset, so it should be shown on your balance sheet as such in an inventory asset account. You’d be surprised to know that many people think inventory is simply an expense, because they are purchasing it for resale. The easiest way to start understanding how inventory applies to your business, accounting wise, is to understand where it is in relation to its production, sale and after it is sold. So where do you start and how should you do it? Let us enlighten you a bit, so you, the aspiring entrepreneur, can get a handle on the accounting side of inventory and cost of goods sold. So many factors need to be considered when accounting for inventory. Those finished products have to sit and wait somewhere until they get sold, get in the hands of people to try and promote them, and sometimes they get broken, spoiled or stolen (all with costs associated). The small business dreamer will start to get bogged down almost immediately when all of the little pieces that turn into that product need to be tracked and have a cost associated with it. It seems simple - figure out a cool product to sell, find all the bits and pieces needed to create the product, sell it and live happily ever after in the business world. It’s no secret that inventory is complicated and dynamic for the inventory entrepreneur.
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