Inventory Accounting
Published: 2026-03-04
A practical guide to inventory accounting: how inventory affects profitability, common costing methods, and how to keep inventory records accurate.
- Inventory is an asset; when you sell items it moves to COGS.
- If counts or valuation drift, profit and gross margin become unreliable.
- Moving average (weighted average) is practical for many small businesses.
Inventory accounting answers a simple question: how much inventory do you have, what is it worth, and how does that affect profit? Clean inventory tracking keeps financial statements accurate and prevents surprises.
Why inventory matters
Inventory is an asset. When you sell items, inventory value moves to cost of goods sold (COGS). If inventory counts or values drift, profit becomes unreliable.
Key inventory terms
- Inventory asset: value of items you hold for sale
- COGS: cost assigned to items sold during a period
- Adjustments: corrections for shrink, damage, or count differences
Common costing methods
Businesses value inventory using a costing method. Common approaches include FIFO, LIFO (less common), and weighted average (moving average).
Weighted average (moving average)
With moving average, each purchase updates the average unit cost. It’s a practical method for many small businesses because it smooths price changes and keeps valuation stable.
How to keep inventory accurate
- Record purchases and sales consistently
- Perform periodic counts and reconcile differences
- Use adjustments for shrink/damage rather than ignoring it
- Review inventory valuation reports regularly
How FlowBooks handles inventory
FlowBooks V1 supports inventory tracking and valuation using moving average (weighted average). This keeps costing practical and reporting consistent.
Related
- See pricing: /pricing
- View features: /features
- Accounting for small manufacturers: /guides/accounting-for-small-manufacturers
FAQ
What is COGS?
Cost of Goods Sold is the cost assigned to items sold during a period.
How often should I count inventory?
At least periodically (monthly/quarterly) and anytime you suspect drift or shrink.