- November 14, 2018
- Posted by: Rivero, Gordimer & Company
- Category: Business Advice
Inventory transactions are a basic, but critical, accounting concept that affects small businesses that sell goods. While businesses can survive despite poor inventory tracking, accurate and diligent transaction management can have tremendous benefits to your operational efficiency and bottom line.
Below is an introduction to the concept of inventory transactions, but keep in mind that every business has unique requirements for how they track and manage inventory. If you’d like to learn more about how to record inventory transactions for your company, contact a local CPA.
What is an Inventory Transaction?
Businesses that sell tangible products have short-term assets known as inventory. Detailing the inventory lifecycle as it moves throughout a business can help with tax and accounting purposes. The action of transitioning inventory ownership from the business to the customer is known as an inventory transaction.
Consider the following steps when trying to record an inventory transaction in your accounting logs:
- Record the transaction intake in accounts receivable
- Record the cost of goods sold
- Calculate and record revenue (deduct transaction tax)
- Record the inventory value
- Record the tax liability
In the process described above, the accounts receivable log should reflect the retail price of the inventory plus the sales tax. You will also deduct the sales tax from the transaction to record the revenue. After, you’ll reduce the inventory cost of goods sold from the revenue to determine profit, and record the tax liability separate.
Some states require businesses to pay sales tax on a quarter or monthly basis — which should be tracked in a specific tax return for sales tax. Businesses will also report all sales, taxable sales, sales that are exempt, and the amount of taxes owed.
What Are Some Other Inventory Transactions?
Inventory can create a transaction on the books for other reasons outside of a basic consumer transaction. For example, consider businesses that sell products with varying value like a sports t-shirt company. When a team is winning, the clothes are more valuable because there is more demand — when the team is losing, people are not willing to pay a premium.
This sliding value scale impacts the recorded value in your books for that inventory, and companies could be forced to initiate an inventory write-down. This effectively reports the diminished value as a cost of goods sold or could show up on an income statement, depending on the size of the loss.
Another type of inventory transaction is the sale of inventory to other businesses. This type of transaction must clearly be categorized by the bookkeeper to prevent unnecessary taxation. Depending on whether the inventory is sold domestically or internationally it could be worth 5-10 percent of the inventory value to ensure the transaction is coded properly.
Forecasting inventory loses before they are realized is a key component of inventory write-downs. Accountants should be able to make those assessments by looking at the available business data and creating an inventory reserve estimate.
To better visualize this, consider that same t-shirt company from above. They likely have t-shirts created in all sizes, to accommodate any customer. However, they also know that they are more likely to sell medium-sized shirts than they are 3XL shirts. Therefore, businesses can forecast the amount of 3XL shirts that they will not be able to sell and adjust total inventory on the balance sheet based on those estimates.
Invest in Strong Accounting
Financial recordkeeping is an important component of any business, but it is especially critical for startups. Mismanaging inventory can lead to unnecessary debt and lost revenue. By investing in an experienced CPA, you can ensure accuracy with your books and make better strategic decisions founded in concrete data.
While inventory transactions may seem like a small task, it can have a drastic impact on your ability to make accurate decisions related to your most valuable assets (inventory).
Quality CPAs will have experience and expertise in inventory recordkeeping as it relates to tax and accounting purposes. From asset depreciation to inventory write-downs, most small business owners do not understand the intricacies of inventory accounting.
While the information above can provide you with a baseline for understanding inventory transactions better, you should contact a professional CPA Firm like Rivero, Gordimer & Company to guarantee that your accounting and tax needs are met.