When you spend time and money to build up a stock of items that you can sell, you have converted cash into an asset known as "inventory." To properly assess the state of your business, it is important your accounts show the value of this asset.
Accounting for inventory, and similar assets such as Raw Materials and Work in Progress/Unfinished Goods is a fairly advanced accounting topic. This article will take you through the basics.
NOTE: Wave does not calculate or track the unit value of inventory for your business - this workaround only works after you've calculated the monetary value of your units.
Create new accounts
To handle basic inventory accounting in Wave, you need two additional accounts: an Inventory asset account, and a Cost of Goods Sold expense account. Here's how you can create your new accounts:
- On the left-hand menu bar, head to Accounting > Chart of Accounts
- Under the Asset account type, click on the Inventory account to add it. On the next line enter the name of this new account. Click Save to create the new account.
- Under the Expense account type, click on the Cost of Goods account. On the next line enter the name of this new account. Click Save to create the new account.
Now you have two new accounts.
Recording the purchase of inventory
To help explain what to do when you buy and sell inventory, let's go through an example:
Let's say you made a purchase for $100.00 of Inventory, which in this example, is 'Muskoka Chair'.
If you have imported your bank or credit card transactions, categorize this into an asset inventory account. Each type of inventory should have its own asset inventory account. If you made a bulk purchase for multiple inventory types, you will need to split the transaction.
If you did not connect your bank to Wave, then you can enter it manually on the Transactions page. Click the Add Expense button and enter the amount and details. When you get to the Category section, you want to categorize this into your Inventory asset account.
This completes recording the purchase of your inventory.
Recording the sale of inventory
To continue with the example, let's say you made a sale to a customer for $20.00 worth of Muskoka Chair inventory, and the actual cost of goods sold is only $10.00.
To record this, you have 1 of 2 options in Wave, depending on whether you're recording the sale with an invoice or without an invoice.
- With an invoice: Either locate your bank-imported income transaction, OR create an income transaction, in Accounting > Transactions and categorize it to 'Payment received for an invoice in Wave' , then, the outstanding invoice.
- Without an invoice: Either locate your bank-imported income transaction, OR create an income transaction, in Accounting > Transactions and categorize it to your income account of choice, for example, 'Sales'.
Each time you make an inventory sale and either match to an invoice or categorize this into income, you will also have to record a journal transaction to debit your inventory cost of goods sold account and credit your inventory asset account. You can make this journal in Accounting > Transactions > More.
All in all, your transactions related to this inventory movement will look something like this:
From here, you can check your Balance Sheet to verify the balance of your accounts:
And you can check out your Profit & Loss statement to see how your business performed after conducting this sale!