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Elements Of The Accounting System: Inventory Are you selling products? Then you'll need to keep track of inventory.

Unless you are starting a service business, a goodinventory-control feature will be an essential part of yourbookkeeping system. If you are going to be manufacturing products,you will have to track raw materials, work-in-process and finishedgoods, and separate subledgers should be established for each ofthese inventory categories. Even if you are a wholesaler orretailer, you will be selling many different types of inventory andwill need an effective system to track each inventory item offeredfor sale.

Another key reason to track inventory very closely is the directrelationship to cost of goods sold. Since nearly all businessesthat stock inventory are required to use the accrual method foraccounting, good inventory records are a must for accuratelytracking the material cost associated with each item sold.

From a management standpoint, tracking inventory is alsoimportant. An effective and up-to-date inventory-control systemwill provide you with the following critical information:

  • Which items sell well, and which items are slowmoving
  • When to order more raw materials or more items
  • Where in the warehouse the inventory is stored when it comestime to ship it
  • Number of days in the production process for eachitem
  • The typical order of key customers
  • Minimum inventory level needed to meet daily orders

Excerpted from Start Your Own Business: The Only Start-UpBook You'll Ever Need, by Rieva Lesonsky and the Staff ofEntrepreneur Magazine, © 1998 Entrepreneur Press

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