How to manage inventory FIFO, LIFO, AVCO

When you’re doing inventory accounting properly you gain a number of insights that can both save your business money and increase profits. There are a few ways to do it and they don’t all involve physically counting every single item this video covers. The different ways to value your inventory including FIFO LIFO and average cost methods and two different inventory management systems periodic. And perpetual we’re not giving tax advice though and it’s always best to speak with a qualified advisor if you have specific questions or if you want to change how you manage your inventory of course you want to know how much inventory or stock. You have on hand but the bookends of inventory accounting or what each item cost you and the price that you sell or sold each item for at its simplest your inventory cost. Equals the price you paid to purchase it as your business grows you may want to include the cost of shipping storing and sharing and any labor costs associated with your inventory. But for now, let’s just stick with the purchase price also known as the buy price both your buy price and your sell price are likely to change over time let’s say your vendor starts charging you. More or you get a huge supply of product and a bulk rate or maybe you decide to sell some outdated items at a discount when your buy and sell prices change so do your profit margins. And so does the value of the inventory on your books here are three different ways to link your buy price in your sell price for accounting purposes with the first-in-first-out or a FIFO method. It’s assumed that you sold the items in the order that you purchased them this doesn’t have to happen literally you can sell them in any order you like unless you’re selling perishable items from an accounting perspective. 

 

You imagine that everything happens in sequence when a new item comes in you note what it costs and places it in line to be sold even if that line is only imaginary when you sell one of those items. You record the sale price as if you had sold the first item and repeat for each item in the sequence in the US there’s also the last in first out or LIFO method which makes the opposite assumption. You account for all items as if you sold the ones that have just come in before the ones that were already on the shelf or in the storeroom and then there’s the weighted average cost method. Sometimes known as Avco rather than tracking the perch and sale price for each individual item of inventory you use averages for each product work out. 

 

The average buy price and the average sale price this method doesn’t work very well if prices fluctuate a lot and it gets confusing quickly if your vendors are regularly introducing new versions of the same products. Once you’ve chosen one of these methods FIFO LIFO or AVCO you generally want to stick to it lets you create any unwanted accounting issues for your business. There are a lot of factors that go into this decision including whether prices are going up or down whether the method is even legal where you are in your tax situation. And what is possible with your inventory management software again it’s always a good idea to ask your accountant to help you pick the best method for your situation. And now let’s go over the periodic and perpetual inventory management systems if you’ve ever been involved in painstakingly counting every single item of stock in a shop in the storeroom. And the warehouse you’re already familiar with the periodic inventory system at the end of an accounting period such as at the end of the financial year. You physically count everything on hand and reconcile that stock count against all your purchase and sales records. If your records say that you should have more than what you actually counted you write the differences off as losses fortunately this is not the only option for perpetual inventory systems also known as dynamic inventory systems. Are an automated alternative when you receive new stock you add the count to your inventory using your inventory management software and when you mark an item is sold your software does the subtraction automatically this type of software is often sold as an app that you can plug into your point of sale and invoicing systems and your accounting software it can do all the math for your FIFO LIFO or AVCO accounting in real-time so you can see how much money you’re making on each sale periodic inventory management may be enough for businesses that only sell a few products. 

 

It will show you your inventory costs in a broad sense and will allow you to complete your annual accounting but as you start selling more products at higher volumes periodic inventory management. You can begin to slow you down that’s when an automated perpetual inventory management system makes more sense forget about spending all that time. Fizz counting stock plus you’ll get a better view of inventory levels sales volumes and margins in real-time when it comes to inventory management systems you can change things up when it makes the most sense for instance if you decide to stick with the simplicity of periodic inventory accounting. For now, you can upgrade to a perpetual inventory system later when your business has gathered more momentum just make sure that whatever other business systems you have set up point-of-sale invoicing accounting work well with your chosen inventory software and can accommodate a switch at some point in the future you don’t thank yourself when business starts booming. 

 

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