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Inventory Tracking

For businesses that sell physical products, accurate inventory tracking is essential for profitability, cash management, and financial reporting.

Why Inventory Matters​

Inventory affects:

  • Cost of Goods Sold (COGS)
  • Gross profit
  • Cash flow (money tied up in stock)
  • Taxes (inventory valuation)
  • Customer satisfaction (stockouts vs. overstocking)

Inventory Methods​

Perpetual Inventory System​

Track inventory continuously as transactions occur.

Advantages:

  • Real-time inventory levels
  • Better control
  • Identifies shrinkage
  • Supports reorder points

Best for: Most businesses with inventory management software

Periodic Inventory System​

Count inventory periodically (monthly, quarterly, annually).

Advantages:

  • Simpler
  • Lower cost
  • Less time-intensive

Best for: Very small businesses, low-volume sales

Inventory Valuation Methods​

FIFO (First-In, First-Out)​

Assume oldest inventory sells first.

LIFO (Last-In, First-Out)​

Assume newest inventory sells first.

Weighted Average​

Use average cost of all units.

Note: Choose method carefully—affects COGS, profit, and taxes.

Inventory Recording​

Purchase:​

Debit: Inventory
Credit: Cash (or Accounts Payable)

Sale (Two entries):​

1. Record revenue:
Debit: Cash (or Accounts Receivable)
Credit: Sales Revenue

2. Record COGS:
Debit: Cost of Goods Sold
Credit: Inventory

Best Practices​

  1. Regular physical counts (reconcile to books)
  2. Cycle counting (count portions regularly)
  3. Secure storage (prevent theft/damage)
  4. Reorder point system (avoid stockouts)
  5. Dead stock management (clear slow-moving items)
  6. Barcode/SKU system (accurate tracking)

Next Steps​

You've completed Part 3! Ready to learn period-end procedures? Continue to Part 4: Period-End Procedures.