Dealing with inventory is the trickiest part of accounting. It is imperative that you match the sales revenue with the purchase costs that relate to those specific sales for your accounting reports to be accurate.
If you have an accounting system that handles inventory you’re well on the way to accurate reports, but I’ve found that many businesses don’t have this and as a result, their accounting reports are not showing their true gross profit and net profit.
My top 3 tips for dealing with inventory are:
Add doing a stocktake to your end of month checklist and do it without fail. Create a list of your inventory items and manually count how many you have on your premises on the last day of the month. Ideally, create this in a spreadsheet so you can enter the inventory count. This will then automatically calculate the value of your inventory.
The reason for this is that if you’ve purchased stock in a particular month, but the sales will happen in the following few months, the results for the month when the bill is entered will show a high cost of sales and reduced profit. You need to treat those purchases as stock on hand at the end of the month. Then you process the adjusting entry in your accounting records.
When you’re buying your inventory from overseas and paying in foreign currency, you’re always going to have discrepancies. Firstly, between the converted price when you enter the bill into your accounting system and the actual price you pay when you pay the bill. Secondly, there will also be a difference between the converted rate at the end of the month. This will be for stock on hand and either the amount you’ve paid or the converted bill price.
An inventory system will allow for discrepancies with assumptions set up as to whether stock is sold on a first-in first-out basis or prices are averaged. But if you don’t have this automatically calculated for you, be aware that there will always be some differences.
When there is a major correction in the exchange rates, there will be a bigger impact on the figures. But if the exchange rate is not changing too much, the discrepancy will be minor if you use the end of month exchange rates to calculate the value of your stock on hand.
I have recently been helping a client with inventory reporting issues. In their case, they order products specifically when they have a confirmed sales order from their customer. We are instigating a system for the bookkeeper. The bookkeeper will be able to match the bills for the purchase of products with the sales invoices. In this way, we are ensuring that the purchase is entered in the same month as the sale.
If there’s a bill for the purchase and the sales invoice hasn’t been processed, the bookkeeper will be following up with the team to identify why the sales invoice hasn’t been processed. If it hasn’t been sold, then the item will form part of the end of month stocktake figures.
Similarly, if there’s a sales invoice and no purchase bill, the bookkeeper follow up to determine where the bill is for the purchase. If it was processed in the previous month and included in the inventory, that will be fine. But if not, it may just be that there’s a bill that’s been missed.
When you are dealing with inventory in your business, matching purchases with sales is the key to ensuring accurate reports. Do regular monthly stock takes and enter stock on hand into your accounting system. Use the end of month exchange rates and match sales invoices with purchase bills.
When you do this, you’ll have a much clearer picture of your gross profit and net profit for the month.
Originally published on www.smallville.com.au