{"id":297058,"date":"2026-01-20T11:19:39","date_gmt":"2026-01-19T22:19:39","guid":{"rendered":"https:\/\/www.reckon.com\/nz\/?post_type=sbh&#038;p=297058"},"modified":"2026-03-05T17:33:37","modified_gmt":"2026-03-05T04:33:37","slug":"accounting","status":"publish","type":"sbh","link":"https:\/\/www.reckon.com\/nz\/small-business-resources\/inventory\/accounting\/","title":{"rendered":"What is inventory accounting?"},"content":{"rendered":"<p>[et_pb_section fb_built=&#8221;1&#8243; custom_padding_last_edited=&#8221;on|phone&#8221; _builder_version=&#8221;4.23&#8243; custom_padding_tablet=&#8221;&#8221; custom_padding_phone=&#8221;0px||||false|false&#8221; da_disable_devices=&#8221;off|off|off&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; da_is_popup=&#8221;off&#8221; da_exit_intent=&#8221;off&#8221; da_has_close=&#8221;on&#8221; da_alt_close=&#8221;off&#8221; da_dark_close=&#8221;off&#8221; da_not_modal=&#8221;on&#8221; da_is_singular=&#8221;off&#8221; da_with_loader=&#8221;off&#8221; da_has_shadow=&#8221;on&#8221;][et_pb_row column_structure=&#8221;1_3,2_3&#8243; _builder_version=&#8221;4.23&#8243; background_size=&#8221;initial&#8221; background_position=&#8221;top_left&#8221; background_repeat=&#8221;repeat&#8221; width=&#8221;100%&#8221; custom_padding=&#8221;||0px||false|false&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_column type=&#8221;1_3&#8243; module_class=&#8221;table-contents&#8221; _builder_version=&#8221;4.23&#8243; background_color=&#8221;#f3f2f6&#8243; custom_padding=&#8221;25px||25px||true|false&#8221; sticky_position=&#8221;top&#8221; sticky_limit_bottom=&#8221;section&#8221; sticky_position_tablet=&#8221;top&#8221; sticky_position_phone=&#8221;none&#8221; sticky_position_last_edited=&#8221;on|desktop&#8221; border_radii=&#8221;on|24px|24px|24px|24px&#8221; global_colors_info=&#8221;{}&#8221; custom_padding__hover=&#8221;|||&#8221;][et_pb_text _builder_version=&#8221;4.23&#8243; text_font=&#8221;||||||||&#8221; global_colors_info=&#8221;{}&#8221; background__hover_enabled=&#8221;on|desktop&#8221;][\/et_pb_text][\/et_pb_column][et_pb_column type=&#8221;2_3&#8243; _builder_version=&#8221;4.16&#8243; custom_padding=&#8221;|||&#8221; global_colors_info=&#8221;{}&#8221; custom_padding__hover=&#8221;|||&#8221;][et_pb_text admin_label=&#8221;Copy paste body text here&#8221; _builder_version=&#8221;4.27.5&#8243; header_2_font_size=&#8221;32px&#8221; header_2_font_size_tablet=&#8221;30px&#8221; header_2_font_size_phone=&#8221;26px&#8221; header_2_font_size_last_edited=&#8221;on|tablet&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221;]<span style=\"font-weight: 400;\">What is inventory? Understanding and applying inventory accounting is essential on two fronts. On one hand, inventory accounting is integral to your tax and reporting responsibilities. On the other hand, it also acts as a key indicator of how well you\u2019re running your business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If your small business purchases, holds and sells inventory of any description, you need to come to terms with how inventory works and how to manage, report and account for it through sound inventory accounting.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What is inventory accounting?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Inventory accounting is a way to declare, calculate and report upon the value of your business\u2019s inventory.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In basic terms, inventory accounting assists you to understand:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">how much inventory your business has<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">how much your inventory cost you<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">what your inventory can sell for.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">We frame inventory in accounting terms as your inventory is both an <\/span><i><span style=\"font-weight: 400;\">asset<\/span><\/i><span style=\"font-weight: 400;\"> and an <\/span><i><span style=\"font-weight: 400;\">expense<\/span><\/i><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As such, inventory accounting helps you understand the value of your business and how well you\u2019re balancing stock, sales, expenses and cashflow.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you nail your inventory accounting, you\u2019ll receive a far broader and more accurate overview of how well managed your business is.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Is inventory an asset or expense?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">For accounting purposes, inventory is understood as<\/span> <span style=\"font-weight: 400;\">both an asset <\/span><i><span style=\"font-weight: 400;\">and<\/span><\/i><span style=\"font-weight: 400;\"> an expense.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Inventory is an <\/span><i><span style=\"font-weight: 400;\">asset <\/span><\/i><span style=\"font-weight: 400;\">as it holds material value and potential sales are associated with it. But inventory is also classified as an <\/span><i><span style=\"font-weight: 400;\">expense<\/span><\/i><span style=\"font-weight: 400;\"> because it cost your business capital to purchase it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For a better understanding, read about <a href=\"https:\/\/www.reckon.com\/au\/small-business-resources\/starting-a-small-business\/what-is-and-how-calculate-cost-of-goods-sold\/\">COGS or \u2018cost of goods sold\u2019 <\/a><\/span><span style=\"font-weight: 400;\">here<\/span><span style=\"font-weight: 400;\">.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">How do you record inventory in accounting?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">So how does one record inventory in their accounting? In basic terms, when your busines purchases inventory, such as beans for a caf\u00e9, you\u2019ll record your beans as both an expense and an asset in your software or spreadsheet.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you eventually sell those beans, you\u2019ll record this as income and concurrently remove the items from your ledger of assets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There\u2019s also an alternative method. You can record the inventory you bought solely as an asset and then only record the cost simultaneously with the sales income when you sell your inventory.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">How do value stock in accounts?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">So how do you value stock in your accounts? What if you paid various amounts for inventory over your reporting period?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With the prices of inventory often fluctuating, a cost disparity between orders is highly possible. As such, you\u2019ll need a method for simplifying and accounting for the varying cost of your goods.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are several methods for working out how to value inventory or stocks over a period of time. These are the most common and useful methods of valuing stock or inventory:<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-264847 alignnone size-full\" src=\"https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2023\/07\/1._SBH_Inventory_Guide_-_what_is_inventory_accounting.png\" alt=\"\" width=\"940\" height=\"300\" \/><\/p>\n<h3><span style=\"font-weight: 400;\">1) AVCO (weighted average cost method)<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">As the name suggests, this method averages the price of your purchased inventory. For each item type you bought, you simply find the average price across the period.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">By multiplying the average price of a product line by the quantity of items sold, you\u2019ll have the value of your inventory.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, this method becomes rather inexact, particularly if you have large price changes. Your actual inventory value might in fact be above or below this result.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">By using the AVCO method of inventory accounting, you can miss out on valuable data relating to specific profit margins and how the price of your inventory changed over time.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">2)\u00a0 FIFO (first in, first out method)<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Another method of inventory accounting you can use to calculate the value of your inventory is FIFO accounting.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For this method, you specifically assign the actual cost to each inventory item in a line of producers. This method functions on the assumption you sell older stock first (not necessary in action).\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Upon making a sale, you record the sale price at the same time you cross off the oldest item in your inventory.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The FIFO method, although more intricate, gives you a better understanding of your profit while shining a light on the real cost of goods.\u00a0<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">As with almost any accounting tasks, inventory accounting is best served by investing in time with a business advisor to recommend the best methods of inventory accounting for your business. By coupling this advice with some <a href=\"https:\/\/www.reckon.com\/nz\/accounting-software\/industries\/\">industry leading software<\/a> to take the leg work out of daily operations, you\u2019ll have a perfect solution to your inventory accounting needs.<\/span><\/i><br \/>\n[\/et_pb_text][ba_social_share icon_bg=&#8221;#03002e&#8221; icon_padding=&#8221;10px|12px|10px|12px|true|true&#8221; layout=&#8221;classic&#8221; show_text=&#8221;off&#8221; btn_padding=&#8221;0px|0px|0px|0px|false|false&#8221; btn_bg_color=&#8221;RGBA(255,255,255,0)&#8221; _builder_version=&#8221;4.23&#8243; _module_preset=&#8221;default&#8221; custom_margin=&#8221;50px||||false|false&#8221; custom_padding=&#8221;25px||||false|false&#8221; custom_css_before=&#8221; content: %22SHARE THIS%22;|| font-size: 16px;|| font-weight: 700;|| line-height: 22px;|| letter-spacing: 0em;|| text-align: center;|| color: #ff5447;|| margin-bottom: 10px;|| display: inline-flex;|| position: absolute;|| margin-top: 10px;&#8221; border_width_top_main=&#8221;1px&#8221; border_color_top_main=&#8221;#e4e4e4&#8243; border_radii_icon=&#8221;on|5px|5px|5px|5px&#8221; global_colors_info=&#8221;{}&#8221; custom_css_before_last_edited=&#8221;off|desktop&#8221;][ba_social_share_child _builder_version=&#8221;4.23&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][\/ba_social_share_child][ba_social_share_child network_type=&#8221;facebook&#8221; _builder_version=&#8221;4.23&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][\/ba_social_share_child][ba_social_share_child network_type=&#8221;linkedin&#8221; _builder_version=&#8221;4.23&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][\/ba_social_share_child][ba_social_share_child network_type=&#8221;email&#8221; _builder_version=&#8221;4.23&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][\/ba_social_share_child][\/ba_social_share][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Inventory accounting records, values and reports your company\u2019s inventory. Learn how to track and manage your business&#8217;s inventory here.<\/p>\n","protected":false},"author":6,"featured_media":297060,"menu_order":0,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"sbh_category":[187],"class_list":["post-297058","sbh","type-sbh","status-publish","format-standard","has-post-thumbnail","hentry","sbh_category-inventory"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.4 (Yoast SEO v27.4) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What is inventory accounting? | Small Business Resources | Reckon NZ<\/title>\n<meta name=\"description\" content=\"Inventory accounting records, values and reports your company\u2019s inventory. 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