For retail business, your company’s on-hand, unsold inventory has a cost value, which is likely higher than the company’s cash balance. Inventory accounting allows you to know exactly how much inventory you have and its value to the business, at the end of each accounting period, so you have a clearer idea of how well your business is performing overall. As inventory needs to be reported on your company’s tax return, with asset numbers correctly calculated and properly documented in end-of-year balance sheets, profit & loss (P&L) reports and other financial records, hiring a Malaysia accounting firm that provides accounting service in Malaysia is an important business decision that you may have to make when company finances get complex as your business grows.
Accounting Service in Malaysia
Retail companies in Malaysia generally use two main valuation methods for inventory accounting:
- First In, First Out (FIFO)
- Average Cost Method
FIFO tracks and values your unsold warehouse stock, assuming the oldest inventory purchased to be the ones first sold. Therefore, earliest dated on-hand inventory available is what is used to fulfil an order that comes in. For companies dealing with perishable goods, such as food and beverage, FIFO prevents products from spoiling or crossing their best-before sale date, ensuring their clients only receive the freshest from their inventory.
The Average Cost Method applies to businesses that prefer to calculate inventory value is based on the average cost of items throughout a relevant period, instead of tracking cost per inventory unit for each separate purchase delivery. The average cost can be derived by dividing the overall cost of products for sale by the total number in the inventory.
A Note on Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) refers to the costs associated with acquiring or manufacturing goods to be sold by a company during a specific period of time.
The following formula allows you to calculate how much inventory you had to buy in order to earn your sales revenue. Most businesses use it to perform their inventory accounting, which will help the company understand how well it is performing financially overall.
COGS = beginning inventory + purchases – ending inventory
- Beginning Inventory is the inventory of goods that were not sold and were leftover in the previous financial year
- Purchases refer to the additional merchandise added by a retail company or additional production of goods undertaken by the manufacturing firm. These Purchases are added to the Beginning Inventory.
- Closing Inventory refers to the goods that were not sold during the current financial year. Such inventory is subtracted from the sum total of Beginning Inventory and Purchases in order to calculate COGS.