when you're doing inventory accounting

properly you gain a number of insights

that can both save your business money

and increase profits there are a few

ways to do it and they don't all involve

physically counting every single item

this video covers the different ways to

value your inventory including FIFO LIFO

and average cost methods and two

different inventory management systems

periodic and perpetual we're not giving

tax advice though and it's always best

to speak with a qualified advisor if you

have specific questions or if you want

to change how you manage your inventory

of course you want to know how much

inventory or stock you have on hand but

the bookends of inventory accounting or

what each item cost you and the price

that you sell or sold each item for at

its simplest your inventory cost equals

the price you paid to purchase it as

your business grows you may want to

include the cost of shipping storing and

sharing and any labor costs associated

with your inventory but for now let's

just stick with the purchase price also

known as the buy price both your buy

price and your sell price are likely to

change over time let's say your vendor

starts charging you more or you get a

huge supply of product and a bulk rate

or maybe you decide to sell some

outdated items at a discount when your

buy and sell prices change so do your

profit margins and so does the value of

the inventory on your books here are

three different ways to link your buy

price in your sell price for accounting

purposes with the first-in first-out or

a FIFO method it's assumed that you sold

the items in the order that you

purchased them this doesn't have to

happen literally you can sell them in

any order you like unless you're selling

perishable items from an accounting

perspective you imagine that everything

happens in sequence when a new item

comes in you note what it costs and

place it in line to be sold even if that

line is only imaginary when you sell one

of those items you record the sale price

as if you had sold the first item and

repeat for each item in the sequence in

the US there's also the last in first

out or LIFO method which makes the

opposite assumption you account for all

items as if you sold the ones that have

just come in before the ones that were

already on the shelf or in the storeroom

and then there's the weighted average

cost method sometimes known as Avco

rather than tracking the perch

and sale price for each individual item

of inventory you use averages for each

product work out the average buy price

and the average sale price this method

doesn't work very well if prices

fluctuate a lot and it gets confusing

quickly if your vendors are regularly

introducing new versions of the same

products once you've chosen one of these

methods FIFO LIFO or Avco you generally

want to stick to it lets you create any

unwanted accounting issues for your

business there are a lot of factors that

go into this decision including whether

prices are going up or down whether the

method is even legal where you are your

tax situation and what is possible with

your inventory management software again

it's always a good idea to ask your

accountant to help you pick the best

method for your situation and now let's

go over the periodic and perpetual

inventory management systems if you've

ever been involved in painstakingly

counting every single item of stock in a

shop in the store room and the warehouse

you're already familiar with the

periodic inventory system at the end of

an accounting period such as at the end

of the financial year you physically

count everything on hand and reconcile

that stock count against all your

purchase and sales records if your

records say that you should have more

than what you actually counted you write

the differences off as losses

fortunately this is not the only option

perpetual inventory systems also known

as dynamic inventory systems are an

automated alternative when you receive

new stock you add the count to your

inventory using your inventory

management software and when you mark an

item is sold your software does the

subtraction automatically this type of

software is often sold as an app that

you can plug into your point of sale and

invoicing systems and your accounting

software it can do all the math for your

FIFO LIFO or Avco accounting in real

time so you can see how much money

you're making on each sale periodic

inventory management may be enough for

businesses that only sell a few products

it will show you your inventory costs in

a broad sense and will allow you to

complete your annual accounting but as

you start selling more products at

higher volumes periodic inventory

management can begin to slow you down

that's when an automated perpetual

inventory management system makes more

sense

forget about spending all that time Fizz

counting stock plus you'll get a better

view of inventory levels sales volumes

and margins in real time when it comes

to inventory management systems you can

change things up when it makes the most

sense for instance if you decide to

stick with the simplicity of periodic

inventory accounting for now you can

upgrade to a perpetual inventory system

later when your business has gathered

more momentum just make sure that

whatever other business systems you have

set up point-of-sale invoicing

accounting work well with your chosen

inventory software and can accommodate a

switch at some point in the future you

don't thank yourself when business

starts booming thanks for watching and

be sure to check out our other small

business guides