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What is Inventory Item?

Inventory items  are crucial for businesses that deal with physical products. Understanding what an inventory item is and how it’s tracked can help in efficient stock management and improve financial accounting.

Definition of Inventory Item

An Inventory Item is a product that a company purchases for resale purposes. It is essentially a tangible good that can be quantified in stock. In contrast to a non-inventory item, inventory items are tracked for both their quantities and value (in the Stock and in the Balance Sheet), allowing businesses to maintain adequate stock levels and manage the sales and procurement processes efficiently.

Tracking Inventory

Inventory items are tracked through various stages in the business processes. They are included in the customer process – appearing in the KPI Accounts Software under Sales Quotes, Sales Orders, Sales Invoices, and Customer Credit Notes, as well as in the supplier process, showing up in Purchase orders, Purchase invoices, and Supplier Credit Notes. Accounts, as well as other inventory management systems, allow businesses to track the following metrics for inventory items:

  • Quantity on Hand: This represents the total number of items available on Hand, in the warehouse or across all warehouses.
  • Available Stock: This is the Quantity on Hand minus the items that are on sales orders. For instance, if a warehouse has 5 items and 4 are on sales orders, the available stock is 1 item.
  • On Sales Order: This indicates the total number of items that are currently on sales orders.

Adding and Working with Inventory Items

Once the initial setup of the company is completed in an inventory management system, such as Accounts, businesses can start adding new inventory items. This option will appear after the “Accounting Getting Started” page. Detailed information about each item, including the accounts to charge when you buy and sell the item, quantity on hand, and reorder point, can be entered.

Accounting for Inventory Items

When inventory items are purchased and received, the accounting software credits the Pending Goods Received Notes account and debits the Stock asset account. Converting the Purchase Order to a Purchase Invoice credits the Accounts Payable account for the supplier and debits the Pending Goods Received Notes account. Upon selling the items, the software credits the Stock asset account and debits the Materials Purchased (cost of goods sold) account. This accounting process helps in keeping the financial records accurate.

Accounting Stage Action Account Credited Account Debited
Purchase & Receipt of Items Buying inventory items and receiving them Pending Goods Received Notes Stock (Asset)
Conversion to Purchase Invoice Changing the Purchase Order to Purchase Invoice Accounts Payable (Supplier) Pending Goods Received Notes
Sale of Items Selling inventory items to customers Stock (Asset) Materials Purchased (Cost of Goods Sold)

FAQ Inventory Item

What is an Inventory Item?

An Inventory Item is a tangible product that is purchased by a business for the purpose of reselling. These items are quantified and tracked in stock to manage sales and procurement processes efficiently.

How is the quantity of Inventory Items tracked?

Inventory items are tracked through three metrics: Quantity on Hand, which shows the total items available; Available Stock, which is Quantity on Hand minus items on sales orders; and On Sales Order, indicating the total items currently on sales orders.

What is the importance of Inventory Items in accounting?

Inventory items are essential in accounting as they represent a significant investment of business resources. Accurate tracking and valuation of inventory are crucial for financial statements, especially for calculating the Cost of Goods Sold and assessing profitability.

How is accounting for Inventory Items handled?

When inventory items are purchased, the Stock asset account is debited and the Pending Goods Received Notes account is credited. Upon converting the Purchase Order to a Purchase Invoice, the Accounts Payable account is credited and the Pending Goods Received Notes account is debited. When the items are sold, the Stock asset account is credited, and the Materials Purchased (Cost of Goods Sold) account is debited.

Can Inventory Items be both products and services?

Inventory Items typically refer to tangible products. Services are not considered inventory items as they are not tangible goods that can be stored or quantified in the same way physical products are. They fall under non-inventory items.

See also