How Do I Set Up an Inventory System?
If your small business manufactures items for sale or purchases items for resale, you maintain an inventory of products or raw materials for business operation. Tracking inventory amounts and costs are vital to reducing or eliminating losses due to obsolescence and employee theft as well as determining the total cost associated with a product so that you can determine appropriate pricing. The Internal Revenue Service considers inventory an asset rather than an expense, and allows you to expense only the portion of the inventory that you have used. An inventory system can make accounting for inventory an efficient process.
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1.
Take a physical count of each item of inventory on the last day of the month. Do not include damaged or obsolete items in your physical inventory.
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Enter each inventory item into the inventory software. For each item include a detailed description that will be easy for you to recognize. Some inventory software allows you to enter vendor information for each inventory item and assign a value to each piece of inventory. Input as much information into the software as will be useful for reporting purposes.
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3.
Enter a beginning inventory count for each inventory item you added to the software equal to the physical inventory count you took on the last day of the month. That balance will be your starting inventory amount on the first day of the next month of business operations.
References
- Internal Revenue Service: Schedule C Instructions; Profit or Loss From Business
- “Principles of Accounting”; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991
Tips
- As you purchase inventory during the month, record the quantities purchased in the inventory software.
- At the end of each month, perform a physical inventory count. Subtract the physical inventory amount from the inventory in the software to determine your inventory usage for the month. Record your usage at the end of each month in the inventory software.
- The IRS requires you to use the cost method of inventory valuation if you use the cash method of accounting. If you use the accrual method of accounting, you have the option to use the cost method, lower of cost or market or any other inventory valuation method currently approved by the IRS.
Writer Bio
Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.