Acaydia School of Aesthetics LLC Accounting for The Inventory Discussion

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There are two main steps when accounting for inventory, classifying inventory and determination of inventory amounts. In order to take these steps, there are some factors that need to be considered.

The classifying inventory step requires determining first, whether the business is a merchandiser or manufacturer. Those that are merchandisers have items they own and are ready for being sold, and therefore only need one classification, “merchandise inventory”. Manufacturers have three different classifications when it comes to inventory: finished goods, work in progress, and raw materials.

The second step, determination of inventory amounts, has two steps that fall underneath it to ensure the inventory is accounted for correctly. 1) Taking a physical inventory of goods on hand, which includes actually counting, weighing or measuring each kind of inventory. 2) Determine ownership of the goods. This takes a little bit more effort. Goods that are in transit need to be considered as part of the inventory by the seller, if they are the ones paying for the cost of freight. The buyer would consider items in transit as part of their inventory if they pay for the cost of the freight. When it comes to consigned goods, it has to be remembered those goods are not to be included in the inventory of the business holding the items. Consigned goods are goods that are held by a different company than the owner, and for a small fee the holding company will attempt to sell the goods.

When accounting inventory, the cost of the goods also has to be taken into consideration, so that the company is aware of how much they have spent on inventory and how much has been made from sales of goods. Inventory turn-over also has to be considered when accounting for inventory, to ensure items are not sitting too long, as that also can cost the company when the items do not move, but also trying to ensure there is a variety of items in stock, so as to not lose out on the possibility of sales.