Simplifying Inventory Management in Xero: A Guide to Using the Periodic Inventory Method
Inventory management can be a complex and time-consuming task for business owners, especially for those who are just starting out. Fortunately, there is a simple and efficient way to account for inventory using the periodic inventory method in Xero.
The periodic inventory method is a system in which a business updates its inventory balance at the end of an accounting period. This method is often used by small businesses that have a low volume of inventory and do not need to track inventory levels in real-time. In this method, the cost of goods sold is calculated by subtracting the cost of ending inventory from the cost of goods available for sale during the period.
To use the periodic inventory method in Xero, business owners need to follow these simple steps:
Step 1: Set up a chart of accounts
The first step is to set up a chart of accounts in Xero. This includes creating an inventory account and an expense account for the cost of goods sold. To do this, go to the "Accounts" menu and click on "Chart of accounts". Then, click on "Add account" and select "Inventory" or "Cost of goods sold" from the account type drop-down menu.
Step 2: Record inventory purchases
Record all inventory purchases in Xero by creating a purchase order or bill. When creating the bill, select the inventory account from the "Account" drop-down menu and enter the cost of the inventory item in the "Unit price" field.
Step 3: Record inventory sales
Record inventory sales by creating a sales invoice. When creating the invoice, select the inventory item from the "Item" drop-down menu and enter the selling price in the "Unit price" field.
Step 4: Calculate cost of goods sold
At the end of the accounting period, i.e. usually end of month or financial year,
Calculate the cost of ending inventory by taking a physical count of the inventory on hand and multiply the quantity by the cost per unit.
Cost per unit
Cost of Inventory
Calculate the cost of goods sold (COGS) by subtracting the cost of ending inventory from the cost of goods available for sale during the period.
COGS = Cost of ending inventory - Cost of goods available for sale (i.e. the inventory amount reflected in Xero at the end of the accounting period)
Step 5: Record the cost of goods sold
Record the cost of goods sold by creating a journal entry.
Debit the cost of goods sold account and
Credit the inventory account for the amount of the cost of goods sold.
Viola! Now the inventory balance on the balance sheet is the same as the physical count, and the cost of good amount is correct on the profit and loss statement.
Using the periodic inventory method in Xero can simplify inventory management for small businesses. With this method, business owners can track inventory purchases and sales without the need to track inventory levels in real-time. By following the simple steps outlined above, business owners can easily account for their inventory in Xero and focus on growing their business.