Bookkeeping 101 - All You Need to Know About Inventory Transactions

When it comes to checking inventory, it is crucial that you be as accurate as possible with all the details. The slightest misinformation could lead to a loss of profits, on top of additional fees that you may be charged for when it comes time to file for taxes. Therefore, keeping track of your inventory transaction should always be your priority. In this article, we’ll talk about how you can use bookkeeping techniques to minimize errors and failures when it comes to inventory transactions.

A Transaction Overview

Product manufacturers have to keep records of many things, ranging from material ordering, to shipping, arrival time, and of course, overall costs. All of these elements should be recorded to ensure that you have evidence of all the transactions which you can use as the reference for calculations such as profit margins, tax returns, and costs. The full records will provide crucial data you can use for budget optimization. Additionally, it allows you to keep track of inefficient spending so that you can cut down on things that have diminishing returns and invest more in elements that will have a more significant payoff.

What is the Inventory Cycle of a Company?

The inventory cycle for a company is divided into three phases: the ordering phase, the production phase, and the delivery phase. The ordering phase starts when the raw materials are ordered and runs until the goods arrive. The production phase is when the manufacturing process begins — turning raw materials into a finished product. The delivery phase is when the goods are packaged and shipped to the clients or retail stores for further distribution. The length of the cycle is measured in days. For example, the inventory cycle for company A is 50 days: 10 days in the ordering phase, 30 days in the production, and 10 days for delivery.

What is an Accounting Journal?

An accounting journal is a detailed record of every financial transaction for the company. Transactions are recorded in chronological order and organized by date, amount, accounts, and type of transaction. This will help you to keep records of all the comings and goings of your finances.

Listed below is an example of a journal entry for an order of $100 worth of raw materials:

                                                Debit                           Credit
Raw Materials Inventory         $100.00          
Accounts Payable                                                       $100.00

Debit                           Credit

Work in Process Inventory     $100.00          
Raw Material Inventory                                              $100.00

Debit                           Credit

Finished Goods Inventory $100.00
Work in Process Inventory $100.00

Selling Inventory for Cash

Now that you understand how to record the production cycle, the next thing you should understand is when to move the product from an asset to an expense. In simple terms, when a product is sold from the inventory the cost of the goods sold must be recorded. You can use this data logging to see how much profit you are making from each product.

Listed below is an example of how to record this type of transaction:

Debit                           Credit

Cost of Goods Sold                $100.00          

Finished Goods Inventory                                          $100.00
                                               

Debit                           Credit

Cash                                        $100.00          
Sales                                                                           $100.00

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