What is inventory accounting?

Inventory Accounting is a process of monitoring inventory movements in and out of the company. It covers the logistics of shares and related financial accounting. In the financial context, most countries have specific rules on how inventory accounting should be carried out and stated in the Company's accounts. In practice, this may be more complicated because most companies have multiple product lines in multiple warehouses. There is also potential for confusion and complexity, when the manufacturing company takes several steps to produce the final product. For example, with a car, parts such as engine, chassis and windshield can exist either as unused parts or in the form of a completed but unsold car. The company may also have other parts, such as stereo systems that can be added later to the "completed" car to fulfill your own order.

One of the problems that is particularly important in inventory accounting is that the price of purchasing components or shares can change over time. For exampleIt can have 100 shipping boxes in one stage that costs $ 0.10 (USD), and another 100 transport boxes worth $ 0.12, as they were purchased after the price increase by the supplier. Assuming these boxes are identical, there will be potential confusion when the boxes are used and sent to the customer and the company must deduct the value of boxes from the total inventory.

There are two main approaches to this problem. One is known first in First Out or FIFO. This works on the basis of the fact that each unit sent from the inventory is assumed that it is the oldest that has entered the inventory. In the above example, it would be a box that cost $ 0.10.

The main alternative system is the last on the first or lifo. This works on the basis of pre -assumed that each unit sent from the inventory is the last one that has entered the inventory. In the above example, it would be a box that cost $ 0.12. It is important to realize that which box is actually physicIicka sent, it does not matter on accounting conditions.

In a given example, a LIFO company would deduct more money for each box it sent, and the value of the paper left the value of its inventory below. In most cases, this will be the situation due to the effects of inflation. In many cases, the value of the company's inventory is calculated in its income in financial accounts and therefore affects the company's tax obligations. As a result, many US companies use the LIFO system and reduces its tax payments. Some countries require companies to use FIFO, both to increase tax revenues and to make it easier to compare between different companies.