Inventory plays a vital role in the revenue generation of the business. Every business has its own inventory types. For instance, a trading concern maintains goods as their inventory. The efficiency of the business in managing the inventory is generally viewed as a yardstick as to how well the business performs. That is, higher the idle stock, weaker the business. Inventories are maintained either by manufacturing or by acquiring the same from wholesalers and then then engage into transactions as retailers. Inventory management is very important in modern accounting since there is a chance of blocking of working capital funds in the inventory.
If the business is engaged in manufacturing, then the entity has to keep in mind the three forms of inventory that is, the raw materials, work in progress and the finished goods. It is essential to manage enough stock level of finished goods so as to avoid stock outs and suffer loss. Idle stock creates losses too, in the form of spoilage of inventory (whether raw material, work in progress or finished goods), space occupied by such inventory and revenue loss as it may get devalued over time, working capital also affected with inventory storage
Proper accounting should be done for ascertaining the stock levels in terms of its acquisition, processing and the sales of such inventory. In cost accounting., the accounting entries, namely, the integrated accounts is very much helpful in recording the movement of inventory from stores till it gets transformed to finished goods. Such accounting practice enable the finance department to reconcile the profits arrived from both the financial reports and the cost reports. The reconciliation done enables the accountant to analyze the reasons why the finance and cost records have deviated. For instance, in cost accounting (nonintegrated cost accounting) there may be notional figures like income paid to thee proprietor whereas the financial accounting does not involve such notional figures (except for provisions created) but does include dividend income, goodwill written off etc…Hence, integrated accounting ensures saving of time in terms of preparing reconciliation of cost and financial accounts, but the nonintegrated accounts need to be reconciled so that the figures in cost accounting become useful.
Modern Accounting and Traditional Accounting
Modern accounting uses the theories of re order stock levels, maximum stock levels, minimums stock level and danger levels to maintain sufficient stock levels and to avoid revenue loss and idle stock.
The modern accounting ensures paperless transactions as it has replaced the various slips like the bills of material, material requisition note, purchase requisition note, request for proposal and so on. Entering the relevant figures will eventually adjust the stock levels in the reports generated as all the functional departments and its accounting are integrated in the software. For instance, the insufficiency in raw material will give the purchase department, warning to arrange for order and get the sufficient raw materials in time. Therefore, modern accounting packages conduct the stock checks at the regular intervals.
Traditionally, the inventory was valued in different methods like the first in first out method, the last in first out method, or the weighted average. As per the accounting standard no: 2 (valuation of inventories), the stock should be valued either at cost or net realizable value, whichever is lower. The accounting methods used to value the stock must be disclosed in the notes to financial statements. The LIFO method is not appreciated by the accounting standards as it doesn’t reflect the true value of the stock. Hence, it ends up with either the usage of FIFO or weighted average method of valuing stock.
In modern accounting, generally the weighted average method comes into picture rather that the FIFO method. The inventory cost is a direct cost and directly affects the price of the product. Thus the optimum production level ensures the cost to be minimized, leading to lower price and higher demand for the goods produced.
The accounting packages ensures the analysis of the reports generated through the tool like the ratio analysis. One of the ratio which is useful in comprehending the movement of stock is the inventory turnover ratio which enable us to find out within how much days does the stock turns into revenue. It enables us to compare the profitability of certain products produced in the business and the viability to keep it as one of our product lines.
Budgeting in retail Business
In order to, Manage the inventory, the usage of budgets help the user to avoid wastage and unnecessary investment in inventory. When budgets are prepared as to the amount or levels of stock required for the coming financial year and the types of inventory required, the management can make decisions regarding proper usage of inventory and can work maximum to achieve the desired level of production and sales as per the budget prepared.
When the business is a retailer, who purchases the finished products for wholesale price, then with the addition of profit margin, the retailer sells out the stock purchased to the public. In such a scenario, accounting of inventory plays an instrumental role as improper accounting leads to higher financial loss. The retailers on observing that the stock is being kept idle and is perishable in nature, then the retailer may employ the various selling techniques like giving credit facility, discounts, rebates, free samples etc., so that the demand for the goods may increase and the retailer can sell out and eliminate idle stocks in the business.
The credit system, especially the banking system have set the stock reports as one of the criteria of disbursing loan to the credit seeker as stock show cases the ability of the business to generate revenue and also discloses the repaying capability of the business. The stock statements and accounts prepared by the business shall be audited, if the business has the turnover over and above a specified limit, for the bank to consider the business to avail the credit facilities.
Inventory management is thus an important area of concern for all business entity. The efficient record and accounts maintaining will ensure better management of business. Proper accounting and it’s disposal very important for the management of business and finance , with the help of practical accounting knowledge and experience by an accountant inventory can be managed properly
For an expert inventory management and taxation consultancy, contact Lima Tax Consultant at info@limagcc.com or visit limagcc.com