Eligibility Criteria of Inventory Accounting
Business Type:
- Manufacturers: Businesses that produce goods and hold raw materials, work-in-progress, and finished goods need inventory accounting.
- Retailers and Wholesalers: Any business that buys and sells goods will require inventory accounting to track stock levels and sales.
Accounting Framework:
- Businesses must adhere to accounting standards such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). These standards provide specific guidance on how inventory should be valued, tracked, and reported.
- If the business is small and doesn’t deal with large volumes of inventory, simpler inventory methods such as periodic inventory systems may apply.
Inventory Volume:
- If a business regularly handles significant amounts of inventory, especially with complex or large-scale operations, formal inventory accounting is required. The method used to value inventory (FIFO, LIFO, or Weighted Average Cost) must be consistently applied.
Tax Obligations:
- Companies must comply with tax regulations related to inventory, as inventory value affects cost of goods sold (COGS), taxable income, and overall tax liabilities.
Internal Controls:
- A business must have internal control procedures in place to ensure the accurate recording and monitoring of inventory levels. This includes methods for tracking stock movements, preventing theft, and managing discrepancies.
Financial Reporting:
- Companies must be registered with relevant authorities (e.g., GST for tax purposes) if they are required to submit financial reports. These reports often need to reflect accurate inventory valuations to determine net profit or loss.
