Overview of inventory valuation

Overview

Inventory valuation refers to how your stock is valued for accounting purposes. There are two main factors that influence inventory valuation:

• The costing method you use for your inventory (Standard Price, FIFO, AVCO)

• The way you record this value into your accounting books (manually or automatically)

Costing Methods

The costing method is defined in the product category. The costing method is defined at the product category level. There are three options available.

Standard Price - The product is valued at the cost that you define manually on the product form.

AVCO (Average Cost) - The product is valued at the average purchase cost of the product. The cost of the product is recomputed automatically upon each receipt and does not change when products leave the warehouse.

FIFO (First In First Out)- The products are valued at their purchase cost. The cost of the product is recomputed automatically when they leave the warehouse based on the rule that the first value “in” is the first value “out” regardless of the storage location, warehouse, or serial number.

Manual or Automated Valuation

There are two options to record your inventory valuation in your accounting books. Like the costing method, this is defined in the product category.

Manual Inventory Valuation

In this case, goods receipts and deliveries won’t have any direct impact on your accounting books.

Anglo-Saxon Accounting (UK and Ireland, the USA, and other English-speaking countries including Canada, Australia, and New Zealand)

Manual journal entries representing the value of your inventory value and COGS must be created at the end of each period. To know the value of your inventory at a given date, go in Inventory -> Reporting -> Inventory Valuation.

To calculate the COGS, use the formula:

Cost of goods sold (COGS) = Starting inventory value + Purchases – Closing inventory value

Continental Accounting

A manual journal entry to move the stock variation value from your Profit & Loss section to your assets must be made at the end of each period.

Automated Inventory Valuation

With automated inventory valuation, an accounting entry will be automatically created when a product enters or leaves your stock. Therefore, your accounting books are always up-to-date.

To use automated inventory valuation, you must define the accounts that will be used to generate the accounting entries. This is done on the product category.