![]() ![]() This is where inventory valuation methods come into play. So which cost per unit figure do you use to value unsold inventory when there are so many moving parts in a typical accounting period? Sales are also being made at the same time, turning inventory into cash. Numerous purchases of new stock and raw materials are usually made during a typical 12-month accounting period.Įach purchase may have come at a different cost per unit. And this is where it can become a lot more complicated. how much this company asset is worth in monetary terms). ![]() We need to assign an actual value to the unsold inventory figure (i.e. Subtract leftover, unsold inventory at the end of the accounting period. Take the cost of beginning inventory (BI).Īdd the cost of newly purchased inventory during the period in question. To calculate cost of goods sold (COGS) for an accounting period, you'll need to:ĭetermine what costs can be associated with the production process of your specific products - like labor, raw materials, tools, etc. ![]() It’s a simple formula, though it can become more complex if manufacturing your own products.Īll inventory sold will be listed under the COGS account in your income statement at the end of each business year. If you sell an item valued at $50 and the COGS is $30, your company has achieved a gross profit of $20. But (crucially) without factoring in costs not directly tied to the production process - like shipping, advertising and sales force costs, etc.Īs a result, COGS helps you determine the amount of gross profit made in one or more sales. 1) Cost of goods sold (COGS)Ĭost of goods sold (COGS) is a core element of measuring a retail business’s profitability and inventory value.Īs the name suggests, COGS refers to the amount it cost a business to produce the products it sold, including everything that went into it - materials, labor, tools used, etc. Let's take a deeper look at each of these. There are two key terms retailers need to be aware of when it comes to inventory accounting:Ĭost of goods sold (COGS): The direct costs of producing any goods sold by a company.Įnding inventory (EI): The value of any unsold, on-hand inventory at the end of an accounting period. This then, in turn, affects the value of your overall business. Meaning the crux of the matter in all this is to correctly track both the cost of any inventory sold and place an accurate value on the unsold inventory being held at the end of each accounting period.Īny increase or decrease in the value of goods affects your inventory value figure. Your on-hand, unsold inventory needs to be included as an asset in end-of-year financial records. In retail, this can cover three types of inventory or production phases: This is typically more complex than it sounds as inventory is often a 'live figure' that's constantly changing as sales are made and more stock purchased. Inventory accounting is all about how a business would show the stock it holds in its financial records - balance sheets, profit & loss (P&L) reports, etc. But it is highly recommended to seek the services of a professional accountant and/or bookkeeper when it comes to submitting any financial documents. This chapter covers the basics of inventory accounting for greater understanding of inventory management as a whole. Inventory accounting is the practice of correctly valuing this business asset, so it can be properly documented in end-of-year financial records. On-hand inventory isn’t simply stock that hasn’t sold yet - it’s a business asset, and must legally be treated as such.
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