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Before filling out your inventory, it's important to understand the two methods of inventory management and how they affect your ending inventory values.
First, we'll have a look at Perpetual vs Periodical inventory management, and which is right for your business. Then we'll outline average costing method and how it behaves within AccountRight.
Managing a full inventory can sometimes be tricky. The MYOB Inventory Training Course is an excellent resource to better understand AccountRight's inventory and its features - helping you stock smarter.
Perpetual and Periodical are the two methods of managing your inventory.
Note that AccountRight is setup to record inventory perpetually. For more information on recording a periodical inventory, see our page Periodical inventory. Before implementing periodical inventory, you should discuss its suitability with your accounting adviser.
| Perpetual | Method used by AccountRight. Continually tracks monetary and physical inventory movement. In AccountRight, this system is used whenever an item is marked I Inventory This Item. |
| Periodical | Only updates the ending inventory balance when a physical count is done. In AccountRight, this system is used whenever an item is marked with I Buy This Item and I Sell This Item only. |
For more information on when you'd use I Inventory This Item, I Buy This Item, or I Sell This Item, visit our page Creating items.
No matter which inventory method you choose, AccountRight calculates your inventory's value by using the Average cost method.
Unlike other valuing methods, such as First In First Out (FIFO), the average costing method values your inventory by calculating its weighted average value, using the formula: Average Cost=Total Value of the item÷Total Quantity of items. Let's take a look at an example of how this would work in everyday business.
Example
Let's say you purchase 10 wine glasses for $10.00 each. This will result in an average cost of $10.00 per item.
The following day, 10 more wine glasses were purchased, this time for $12.00 each. Your inventory looks like this:
- Total Quantity of win glasses: 20
- Total Value of wine glasses: $220.00
- Average Cost: $11.00 ($220.00÷20)
It's important to note that this example is of the average cost method in a perpetual inventory system, where the average cost is calculated before each transaction.
In a periodical inventory system, the average is recorded after a physical stocktake, the multiplied with the number of items sold and number of units in ending inventory to arrive at cost of goods sold (COGS) and value of ending inventory respectively.
For example, let's say you purchase 10 wine glasses for $10.00 each. This will result in an average cost of $10.00 per item.
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