Inventory Explained
Manager Menu-Tabs > Inventory/Products Tabs
Inventory Tasks
Inventory tasks update inventory items, record and process cash sales and sales on accounts, cash purchases and purchases on account.
Inventory Introduction
Merchandise Inventory consists of goods purchased for the specific purpose of reselling these goods to others. Vehicles are merchandise inventory for a used car dealer; but, are assets classified as Vehicles & Equipment for other businesses. Merchandise Inventory includes only goods that are owned, on hand, and held for sale to customers.
Wholesale and retail types of businesses are examples of businesses that need to account for and maintain records relating to the purchase and sale of these items. Retailers sell products directly to the consumer while wholesalers warehouse and sell large quantities of products to the retailers who in turn sell it to us (consumer). Their principal business activity is the buying and selling of goods and many of their business transactions relate to these buying and selling activities.
Usually the cost associated with maintaining an adequate merchandise inventory represents a significant investment and often is the largest current asset on the balance sheet. Likewise, the cost of goods sold is normally the largest expense item in the income statement.
A typical retail or wholesale business buys inventory to resell and either pays at the time of purchase or better yet is granted credit terms by a supplier(s) and doesn't have to pay for 30 days or whatever terms were agreed upon. Unfortunately, if you don't have it you can't sell it; however, it takes time to sell your inventory and convert the goods into a sale and ultimately back into cash.
So, not only are good records needed but also good inventory management procedures (rules) to aid your business in having enough inventory but not too much. Think of your inventory as an investment that gobbles up some of your cash that won't be available to pay other obligations until the inventory is sold and converted back into cash.
Due to the fact that merchandise inventory is often one of your largest assets, it is imperative that you set up a good record keeping system for monitoring and maintaining this asset.
A sale of a inventory is recorded by increasing the general ledger accounts receivable account or the general ledger cash account (debited) and increasing a general ledger sales revenue account (credited). Also, for sales on account the individual customer records maintained in Accounts Receivable are updated with the sale (invoice).
Costs are also recorded by increasing the cost of goods sold general ledger account (debit) and decreasing the general ledger inventory general ledger account inventory on hand (credit).
Believe it or not, all of this is done automatically.