Inventory : Elements Of The Accounting System

Unless you are starting a service business, a good inventory-control feature will be an essential part of your bookkeeping system. If you are going to be manufacturing products, you will have to track raw materials, work-in-process and finished goods, and separate subledgers should be established for each of these inventory categories. Even if you are a wholesaler or retailer, you will be selling many different types of inventory and will need an effective system to track each inventory item offered for sale.

Another key reason to track inventory very closely is the direct relationship to cost of goods sold. Since nearly all businesses that stock inventory are required to use the accrual method for accounting, good inventory records are a must for accurately tracking the material cost associated with each item sold.

From a management standpoint, tracking inventory is also important. An effective and up-to-date inventory-control system will provide you with the following critical information:

• Which items sell well, and which items are slow moving
• When to order more raw materials or more items
• Where in the warehouse the inventory is stored when it comes time to ship it
• Number of days in the production process for each item
• The typical order of key customers
• Minimum inventory level needed to meet daily orders