Why inventory accounting matters to a first-time founder
How you record inventory affects reported profit, assets and tax. Weak records can make a healthy margin look poor, hide shrinkage or lead to selling below true cost. Consistent quantities and valuation methods help founders understand performance and give accountants, lenders and investors figures they can test.
Examples of inventory accounting
A retailer starts with ₦10 million of stock, buys ₦30 million more and ends the month with ₦12 million. Before adjustments, cost of goods sold is ₦28 million: opening stock plus purchases minus closing stock. A physical count then finds ₦1 million missing, requiring investigation and an appropriate accounting adjustment.
Common misunderstanding
Inventory accounting is more than counting units. It assigns costs to sold and unsold goods using an accepted method, and may include freight or production overhead under applicable standards. FIFO means first in, first out; LIFO is not permitted under some standards and tax systems, including IFRS.
When to use it
Set an inventory accounting policy before volumes make reconstruction difficult. Use consistent product records, purchase costs and stock counts, then investigate material differences. Ask an accountant which costs and valuation method apply to your reporting and tax jurisdiction, particularly for manufacturing, imported goods or obsolete stock.