Inventory accounting is a branch of accounting that is needed to evaluate a company’s inventory assets. It looks after the value and accounting for changes under inventoried assets. The inventory of a company is basically divided into three stages of production – raw materials, work-in-progress, and finished goods which are ready to be sold in the market. The role of the inventory accounting in these three processes is to assign the values to each of them and termed them as the assets of the company. Assets are the goods which will be having high value in the future for the company. Thus, it needs to be properly valued so that a precise value can be determined by the company.
The inventory items included in the production stages can change its value that will impact the company and its working. The reasons can be any for the change in value, such as the taste of the customers, deterioration, depreciation, increase in the demand, becomes outdated, reduction in the market supply, and many others. A perfect inventory accounting system will keep a close watch on the changes made to the inventory goods at all the three levels of the production process and modify the company asset values along with the price linked with the inventory consequently.
How Inventory Accounting Functions
For the proper functioning of the inventory accounting, it is necessary to know how it works. As per GAAP, the inventory must be precisely accounted for, in accordance with the specific set of standards, to control the possibility of overvaluing the profit by minimizing the value of the inventory. Profit can be calculated as revenue minus costs. And, revenue is caused by the sale of the inventory. The profit linked with the selling of the inventory is overstated as the value of the inventory is understated. This can certainly expand the company’s valuation.
Advantages Of Inventory Accounting
There are various advantages of inventory accounting which a company can enjoy. One of them is the exact representation of the financial progress of a company. On the other side, there are many additional advantages to keep a watch on the values of the items with the help of the concerned production stages. Inventory accounting is the one that supports businesses or enterprises to evaluate the profit margins as to where it can be increased at a specific place in the given cycle of the product. It can be observed in the second stage of the production cycle as it consumes a lot of time as well as expenses. Products like medicines, machinery, and technology require a great number of expenses after completing their initial stage. At the time of examining the value of a certain product at a specific stage of production – like transportation of the product and clinical tracks, an enterprise can adjust the variable at that particular stage so that the value of the product remains the same while the profit gets increased by reducing the expenditures.
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