An effective method of inventory management is necessary to properly manage the work in QuickBooks Online. Most businesses do wrong when choosing the perfect inventory for their business, which leads to problems in the future. You have to properly think about the condition and position of your business to choose a method of inventory valuation does QuickBooks Online uses during its process.
In this blog, you will get all the ideas about the different methods of inventory valuation used by QuickBooks Online and the reasons for them.
What is an Inventory Valuation?
Inventory valuation is the way to know the total cost of the unsold goods in that period. This can be used by every business to calculate the cost of goods sold(COGS), which determines the profit or loss percentage of a business in that period. If you have a clear idea of the inventory valuation, then you can work according to a plan for making a profit. It also helps the organization to properly mention the cost of preparing the inventory in the financial report.
Mainly, the inventory valuation includes the cost of raw materials, labour cost, and the transportation cost to send the inventory for sale. The formula for the calculation of inventory value is
The formula for Inventory Value will be = (New Inventory Value + during the period Inventory purchased) – final Value of Inventory at the end of the period.
Simple example of Inventory valuation
Assume the Beginning Inventory value be $20000.
Assume the Inventory Purchase During the Period is $7000.
Assume the end Inventory value be $11000.
The calculation of Inventory value be =( $20000 + $7000) – $11000 = $16000.
Why does QBO use the Method of Inventory Valuation for Business?
The method of inventory valuation used by QuickBooks Online is really crucial for maintaining your cost of goods sold in a period. It can also affect your profit margin, cost of remaining inventory, and the organization’s financial report. Once your organization chooses a method of inventory valuation for QuickBooks Online use, you have to hold it for the later period. In the beginning year of the company, they have to choose a method for creating a proper tax return record and obtain permission from the IRS( Internal Revenue Service). It will also help them to change the valuation method in the later period if they want.
Which Methods of Inventory Valuation Does QuickBooks Online Use?
The main objective of selecting a proper method of inventory valuation does QuickBooks Online to get a proper and understandable financial condition of the business. The method will directly affect the gross profit percentage and the income statement of the business. There are mainly four types of inventory valuation Methods, which are:
First In First Out (FIFO ) Method
First In First Out is the most common and widely used method to sell the inventory. In this method, the first product that is brought from the market will be sold first. FIFO is the cheapest method that can be used by the QBO. Because the inventory cost rises with time, it shows low COGS and high gross income.
Last In First Out (LIFO) Method
In the last-in-first-out method, the newly purchased item from the organization will be sold first in the market. In this method also increase the COGS and the business tax percentage decreases. By selling the old product first, it helps to gain less profit, but more taxation. In this method, you will face a mismatch in the COGS and the new inventory.
Weighted Average Cost
In the weighted average cost, the cost of the product will be decided by taking the average of all the goods made in a period. This type of method is mainly used in an organization that produces a lot of products, but all have the same price.
Specific Identification
A specific identification method is used by the branded organization to set the actual price, which is equal to the production cost. It will help you to choose the exact item that will enhance the COGS and the profit percentage of the business. It is a difficult process and takes a lot of time.
Perfect Methods of Inventory Valuation for QuickBooks Online
No rule says to use this or that inventory method for your organization. You have to choose one method for your inventory valuation does QuickBooks Online use according to your needs, so that you will get a profit in the future and have proper financial management. Then you have to choose one Necessary method that will support your organization’s condition and can complete the financial goal.
- You have to first know in which place and type of product you are going to produce in your organization.
- The total amount of stock is now produced by your business, and if you’re going to buy a new technology that will increase your production.
- If your product has any time limit, then you should not use the LIFO method in your industry.
- If your organization is producing a lot of products at different costs, then you should not use the WAC method.
Which is the Best Method of Inventory Valuation that QuickBooks Online uses?
Every method has some common advantages and disadvantages. According to me, in first-in-first-out method best inventory valuation is used by QuickBooks Online use as which gives the perfect price of your produced goods in the market. It helps your business to properly maintain its cost of goods sold and helps to earn gross profit from the sale of inventory. It will help the organization to achieve its financial goals easily.
Conclusion
Choosing a method for inventory valuation does QuickBooks Online use is very necessary for an organization to get a proper financial report. So that it would enhance your cost of goods sold with the profit percentage. You can choose among FIFO, LIFO, WAC, and specific identification according to your needs. If you still have some doubt related to the inventory valuation does QuickBooks Online use Then you can call our QuickBooks experts for help.