Counting Inventory When Preparing Financial Statements
Inventory is a balance sheet asset account that needs to be adjusted for financial statements at the end of an accounting period. During the accounting period, your company buys inventory and records those purchases in a Purchases account without indicating any change to inventory.
When the products are sold, you record the sales in the Sales account but don’t make any adjustment to the value of the inventory. Instead, you adjust the inventory value at the end of the accounting period because adjusting with each purchase and sale would be too time-consuming.
The steps for making proper adjustments to inventory in your books are as follows:
Determine the inventory remaining.
In addition to calculating ending inventory using the purchases and sales numbers in the books, you should also do a physical count of inventory to be sure that what’s on the shelves matches what’s in the books.
Set a value for that inventory.
The value of ending inventory varies depending on the method your company has chosen to use for valuing inventory.
Adjust the number of pieces remaining in inventory in the Inventory Account and adjust the value of that account based on the information collected in Steps 1 and 2.
If you track inventory using your computerized accounting system, the system makes adjustments to inventory as you record sales. At the end of the accounting period, the value of your company’s ending inventory should be adjusted in the books already.
Although the work’s done for you, you should still do a physical count of the inventory to be sure that your computer records match the physical inventory at the end of the accounting period.