Your company’s inventory is what you sell to your customers. It can either be purchased from a wholesaler and sold on-line or in your store, or it can be the raw materials that you use to manufacture products to sell. It can also be component parts that you put together to make a product to sell.Inventory has value so it is an asset to your business and once you sell it you will be making money. It also has value as collateral if you need a business loan. The cost of selling your inventory (called cost of goods sold) is important for your business as it includes the cost of the items to make your product as well as the costs for storing inventory in your warehouse, shipping products to your customers and hiring people to work in the warehouse.
Keeping Track of your Inventory – in both your accounting system and its physical location is important for your business:
Different Types of Inventory - inventory can be divided into two categories:
Inventory and Cost of Goods Sold – Inventory is essential in calculating the cost of goods sold, which in turn is used to determine gross profit for a business that sells products whether it is a sole proprietorship, partnership or a corporation. The cost of goods sold is calculated by:
The closing inventory at the end of one year becomes the opening inventory at the beginning of the new year. Businesses take physical inventory to make sure that what they have on record is correct. At the same time, they can check for spoilage of obsolete goods and theft or bad record keeping which costs the business money.
From an article by Jean Murray
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