Dictionary / Inventory Accounting
What does Inventory Accounting mean in accounting?
Quick definition
Inventory & costingInventory accounting is how you value stock on the balance sheet and move cost of goods sold when you sell it.
Read more below
It uses the quantities from inventory control and a costing method (FIFO, average cost; LIFO is rare in small-business software). Control counts units. Accounting prices them.
Examples
Buying stock, then selling part of it
You buy 100 widgets at $12 ($1,200) on account from a supplier. Inventory increases $1,200 and AP increases $1,200. You sell 40 at $25. Sales increase $1,000. At $12 average cost, COGS increases $480 and inventory decreases $480. QuickBooks Online does this when the item is an inventory product on a bill and an invoice.
A count that forces a value adjustment
Year-end count is 8 units short. You write inventory down and increase COGS or shrinkage for 8 units at the current cost. The count is inventory control. The write-down is inventory accounting.
Why it matters
Buy $5,000 of product and you have an asset, not an expense, until you sell it. Expense it all on the credit-card payment and you understate inventory and overstate cost in the wrong month. Tax and pricing decisions need the split right.
Keep learning
Start with the bookkeeping basics, then compare software when you are ready to pick a tool.
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What is inventory accounting?
The method for valuing unsold goods as an asset and recording cost of goods sold when they sell (or shrink). It sits on top of accurate counts.
How is inventory accounting different from inventory control?
Control is how many and where. Accounting is what those units are worth and how cost hits the P&L. See inventory control and inventory valuation.
Should I expense inventory when I buy it?
Not if you still have it and you are required (or you choose) to keep inventory records. Purchases of goods for resale are an asset until sale. Very small cash-basis sellers sometimes expense purchases; that is a tax-method choice, not a control shortcut.
Does QuickBooks Online handle inventory accounting?
Yes if you use inventory items. It tracks quantity and a cost method (FIFO in many QBO versions). You still have to count and adjust. Xero can too with inventory enabled.