Inventory management accounting involves reconciling software data with actual inventory, and choosing between perpetual or periodic inventory systems and inventory valuation methods. Internal controls limit access to inventory information and ensure accuracy.
Inventory management accounting is an internal business process that companies use to ensure proper inventory control. This process is usually part of the accounting department and involves heavy use of the company’s automated accounting software package. Reconciliations are a big part of inventory management accounting, as accountants will need to review the information stored in the software program and compare it to the actual inventory in the company’s warehouse. A few different options are available for businesses that need to institute a managerial accounting process for inventory.
One of the first issues a company needs to decide for its inventory management accounting process is whether to operate a perpetual or periodic inventory system. A perpetual system will update inventory accounts whenever the business buys, sells, or adjusts inventory items in the accounting software program. This system also ensures that the company has an accurate record of inventory in terms of overall dollars. Less reconciliation is required during the perpetual inventory process as the system keeps constant track of the inventory.
Periodic inventory systems are less intensive than perpetual systems. However, the system is less accurate and requires a complete inventory every few weeks or months. Accountants will need to create an inventory record from their software package and compare it to the actual inventory. Large adjustments are often required to correct large differences between the two stock values.
Another important part of inventory management accounting is selecting an inventory valuation system. Common book inventory valuation methods include FIFO (first in, first out), LIFO (last in, first out), and weighted average. Many companies use the FIFO method as it is simple and results in old inventory being sold first, reducing the chance of write-offs for obsolete inventory. LIFO inventory valuation sells the newest inventory first; this usually results in higher cost of goods sold and lower net income. Therefore, LIFO will result in less tax liability for the company at the end of the year.
Internal controls are another part of inventory management accounting. These controls limit the number of employees who can access inventory information or complete adjustments or other inventory-related accounting activities. For example, controls restrict access to the system, create audit trails so managers can see which employee worked on inventory projects, lock physical inventory in secure locations, and use periodic audits to provide a third-party view of the inventory process. company inventory. Other controls may be necessary depending on the company’s operating procedures and industry, such as manufacturing or retail.
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