The three things that make up the inventory are namely work-in-progress , raw materials and the finished goods.
Methods for accounting inventory:
- Specific identification method. This method is used for very high cost products only as it is not feasible for others. Under this, each product is monitored separately right from the production to its selling. It involves high data tracking.
- First in, first out method (FIFO method), this method ensures that the products first bought are also sold first. This policy is mostly preffered by many companies due to its ease and accuracy of operation. When the price of the product increase it means that the product bought the earliest are sold at least price. This results in decrease in cost of product, high profits and tax.
- Last in, first out method. (LIFO method), in this the product bought last is sold most latest. Products in stock are the oldest ones. This method is not generally used and is also barred or banned by International Financial Reporting Standards. When the prices rise, under this method, also imply that the price of product selling tends to be more, which hence, results in a lesser amount of profits, and lesser income taxes to pay. In this method, there are more layers of stock as the stock kept is the oldest.
- Weighted average method. In this method, only one layer of stock is maintained. The price of new stock layer bought is stooped into the cost of the already existing stock and weighted average cost is calculated.