Request for Inventory Accounting Assistance
I’m working with a client who engages in buying, selling, and trading products, and I need some guidance on how to accurately account for the trades.
Should I journal entry (JE) the trade value into inventory and then make a corresponding JE to transfer that item to sales once it’s sold?
Here’s the challenge I’m facing:
The client is unsure about the current value of their inventory. Additionally, all their inventory purchases are currently being recorded as cost of goods sold (COGS).
Any advice or insights would be greatly appreciated! Thank you!
One response
It sounds like you’re dealing with a common scenario in inventory Accounting, especially for businesses involved in trading goods. To properly account for trades and track inventory value, here are some steps you can follow:
Establish Inventory Tracking: First, it’s essential to set up an inventory tracking system if one isn’t already in place. This can be as simple as a spreadsheet or as complex as an inventory management software, depending on the volume and complexity of the goods your client handles.
Account for Trades: When your client trades inventory for another product, you should:
Record the Outgoing Trade: When your client sells the item that was received through trade, debit Cost of Goods Sold (COGS) and credit Inventory for the cost basis of that traded item. This way, you are correctly reflecting the expense when the item is sold.
Valuation of Inventory: Since you mentioned that they do not know the current inventory value, you’ll need to find a reliable method to value inventory:
Implement a Costing Method: You could adopt a costing method (FIFO, LIFO, or weighted average) to reflect inventory value consistently.
Adjust Current Journal Entries: If all purchases are currently going to COGS, this needs to change. You’ll want to transition to allocating costs to inventory appropriately to provide an accurate reflection of inventory on the balance sheet. This might require adjusting previous financials to correct the errors.
Regular Reviews: Regularly review and reconcile inventory counts to ensure the values on the balance sheet match physical inventory. This will help in keeping the records accurate.
If your client continues to trade frequently, it might be worthwhile to implement more robust inventory and Accounting practices to simplify tracking and reporting over time.
If you have further questions or need more guidance, feel free to ask!