Inventory accounting is a branch of accounting that focuses on determining the worth of inventory assets and accurately recording any changes. Companies usually have inventory at different stages of production: raw materials, goods in progress, and finished goods ready for sale. Inventory accounting aims to assign values to these items in each stage and document them as valuable assets for the company. These assets represent goods expected to hold future value, making it essential to assess their worth for an accurate company valuation.

Inventories will be considered Assets only when:

1. Held for sale in the ordinary course of business;

2. In the process of production for such sale;

3. In the form of materials/supplies consumed in a production process or in rendering services.

• The cost of inventories includes expenses associated with purchasing, converting, and bringing the inventories to their current state and location and any additional costs directly related to these processes.
• Borrowing costs encompass the interest and additional expenses incurred by an entity when obtaining funds through borrowing. A qualifying asset is an asset that inherently requires a significant amount of time to be prepared for its intended utilization or sale.
• Net realizable value is the anticipated selling price minus costs associated with the completion and execution of the sale in regular business operations.

Inventory Accounting Methods

The cost of inventories for a service provider is determined without incorporating profit margins or non-attributable overheads typically considered in service prices, and it should be assigned using either the First-in, First-out (FIFO) or Weighted Average Cost formula, consistently applied to inventories with similar nature and use.

Reducing inventory values to their net realizable value aligns with the perspective that assets should not be valued higher than the anticipated proceeds from their sale or utilization. This approach may be suitable for consolidating identical or similar items.

When inventories are sold, the cost associated with those inventories should be recorded as an expense in the same period when the corresponding revenue is recognized. If there is a decrease in the value of inventories to their net realizable value or any losses incurred, such amounts should be recognized as expenses when the write-down or loss occurs. Conversely, suppose an increase in the net realizable value of inventories leads to a reversal of a previous write-down. In that case, the reversal amount should be recognized as a reduction in the expense attributed to inventories when the reversal occurs.

Financial statements Disclosure:

(a) Accounting policies adopted in measuring inventories, including cost formula used;

(b) Total carrying amount of inventories and carrying amount in classifications appropriate to the entity;

(c) Carrying amount of inventories valued at fair value less costs to sell;

(d) Amount of inventories recognised as an expense during the period;

(e) Amount of any write-down of inventories recognised as an expense in the period;

(f) Amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period;

(g) Circumstances/Events that led to the reversal of a write-down of inventories; and

(h) Carrying amount of inventories pledged as security for liabilities.

(a) Accounting policies adopted in measuring inventories, including cost formula used;

(b) Total carrying amount of inventories and carrying amount in classifications appropriate to the entity;

(c) Carrying amount of inventories valued at fair value less costs to sell;

(d) Amount of inventories recognised as an expense during the period;

(e) Amount of any write-down of inventories recognised as an expense in the period;

(f) Amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period;

(g) Circumstances/Events that led to the reversal of a write-down of inventories; and

(h) Carrying amount of inventories pledged as security for liabilities.

Services That We Render for Inventory

1. Physical verification of All Inventories- Corporates, Banks, NBFC’s
2. Process Audit for Inventory.
3. Reconciliation of inventory records.

Inventory accounting provides several advantages in managing and evaluating a business's inventory. These include:

• Facilitating accurate inventory valuation: Inventory accounting enables businesses to identify and quantify the types of goods they possess, accurately determining their inventory's value.
• Informing product analysis: By implementing inventory accounting, businesses gain insights into the purchasing patterns of their customers and can identify their top-selling products, enabling informed decision-making and strategic planning.
• Assisting with financial evaluation: Inventory accounting is crucial in evaluating the cost of goods sold and the value of unsold goods at the end of each financial period. By comparing these figures, businesses can assess their operational productivity and profitability.

Inventory accounting empowers businesses to maintain precise inventory records, analyze product performance, and conduct comprehensive financial evaluations.