Valuation of Inventory
The application is designed to calculate the inventory value of each item based on physical balance, which accounts for any discrepancies. It functions by retrieving the unit cost of each product from the official price/cost list, which can be found in the product menu of our SELL module. The unit cost is automatically updated through information extracted from vendor invoices in our BUY module for purchased items, including products and materials.
Last purchase price is then selected for these purchased items and transferred to the price/cost list. As for manufactured products, the unit cost must be manually updated in the price list if you are using your own product costing app that doesn't integrate with our inventory system.
However, if you choose to rely on our production issue note, you can activate the transfer of the unit cost from the production summary sheet by selecting "update price/unit cost list."
Please take note that the accurate valuation of inventory is of utmost importance in maintaining the precision of financial statements produced by our Accounting App. Accounting standards require that inventory is valued at its fair value, and we have adopted a conservative approach to avoid the risk of overvaluing the inventory. This approach ensures that the inventory is not overestimated, which could have a negative impact on the gross profit margin.
Overstated inventory costs are deferred to the following financial period, which could lead to a reduction in the cost of goods sold for the current financial period. You can easily comprehend this effect by analyzing the accounting entries that our app generates at the end of an accounting period, regarding the values of opening and closing inventory.
"Opening Inventory" refers to the inventory of products and materials carried forward from the previous financial period. It will be sold or used in production within the current accounting period. On the other hand, "Closing Inventory" refers to inventory carried forward to be sold or used in production in the ensuing financial period.
At the end of current financial period, we debit the cost of goods sold with the value of opening inventory and credit the opening inventory account with the same value. Similarly, we debit the closing inventory account with the value of closing inventory and credit the cost of goods sold with the same value.
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