How to manage your inventory in accounting

Inventory management and accounting are important parts of a company's finances, especially for companies that sell goods or manufacture products. Having an accurate and up-to-date inventory in the accounting is crucial to getting the right picture of the company's financial position at year-end. In this blog post, we explain how to book inventory, why it is important to do it correctly, and what you should consider at year-end to get an accurate valuation of the inventory.

What is Stock and Why Is It Important?

Inventory consists of the goods that a company has available for sale or production, but has not yet sold. It can be both finished products, semi-finished products and raw materials. Since inventory constitutes an asset for the company, it is important to correctly report it in the accounting.

Keeping track of inventory is not only important for showing the company's assets, but also for calculating the cost of goods sold (COGS) and calculating profit correctly. If inventory is not recorded correctly, it can lead to incorrect figures on both the income statement and balance sheet.

Accounting for Inventory: How to Do It?

Inventory accounting is about regularly updating and valuing inventory to ensure it is in line with reality. Here is a basic overview of how to record inventory in your accounting.

1. Purchasing Goods for Warehouse

When you purchase goods to add to your inventory, you post the purchase as an asset in account 1400 Inventory . If you pay VAT on the purchase, you also post the VAT in account 2641 Input VAT .

Example:

• You buy 100 units of a product for 10,000 SEK excluding VAT, VAT at 25% is 2,500 SEK, the total is 12,500 SEK.

Accounting:

Explanation:

• 1400 Inventory increases by 10,000 SEK, which is the cost of the goods excluding VAT.
• 2641 Input VAT reports the VAT that you can deduct.
• 2440 Accounts payable shows the debt you have to the supplier that you must pay.

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2. When Goods Are Used or Sold

When goods are taken from inventory (either for sale or manufacturing), you should post them as cost of goods sold . Here you move the value of the goods from inventory to cost of goods sold (5000) .

Example:
If you sell 50 units of the product you purchased for 10,000 SEK (excluding VAT), then you should record the sale and remove the corresponding value from inventory.

Accounting:

Explanation:

• 5000 Cost of goods sold increases by 5,000 SEK (half the value of the purchase, since we have sold half of the goods).
• 1400 Inventory decreases by the same amount because these items have been taken from inventory.

Year-End Closing and Inventory: What Should You Consider?

At year-end, it is especially important to ensure that inventory is valued correctly, as it affects both the income statement and the balance sheet. Here are some things to consider when it comes to inventory at year-end:

1. Inventory of Stock

Before you can value your inventory for year-end accounting, you need to take an inventory . This involves counting all the items in your inventory and checking that the inventory matches what is in your books. This can be done by physically counting the items, or by using a digital system that continuously updates the inventory.

2. Inventory of Unsold Goods

At year-end, you need to ensure that you account for all goods remaining in stock. If some goods are no longer saleable (e.g. damaged or expired products), you may need to write down their value. It is important that inventory is valued correctly to give a fair picture of the company's financial position.

Example:
If you have goods in stock at a purchase price of SEK 10,000, but the value has decreased due to damage and they are now worth SEK 8,000, you need to adjust the inventory value in your accounting.

Posting inventory adjustment:

Explanation:

• 4960 Inventory loss is posted to adjust down the value of the inventory.
• 1400 Inventory decreases by the adjusted amount.

3. Valuation of the Warehouse

At year-end, inventory must be valued correctly, which means using cost (the price you paid for the goods) or net realizable value (the price you can sell the goods for). If the market value of the goods has decreased, you must make an impairment loss to reflect this.

4. Inventory and Income Statement

Inventory affects the cost of goods sold (COGS) , which is part of your income statement. If inventory has increased during the year, it will reduce COGS and increase profit. If inventory has decreased, COGS will increase and decrease profit.

Summary:

1. Accounting for inventory is done by registering purchases as assets (in account 1400) and storing them there until they are used.
2. At year-end, you take a physical inventory to ensure that your inventory matches the accounting records.
3. You must also adjust the inventory value if there are damaged or obsolete goods and correctly value the inventory based on cost or net realizable value.
4. Inventory adjustments, including write-downs, are posted to the correct accounts (e.g. 4960 Inventory Loss).

Keeping track of your inventory at year-end is crucial to getting an accurate financial picture of your company. By being meticulous with your accounting and keeping your inventory in order, you ensure that both your balance sheet and income statement are accurate.