Valuing your inventory correctly
Counting stock tells you how many items you have. Valuation tells you what they are worth. Both matter, because the value of inventory goes straight into the balance sheet and, through the cost of goods sold, into profit and tax.
Why valuation can go wrong
The same physical stock can be valued differently depending on the method, the costs included and how old or damaged goods are treated. Mistakes are often not dramatic, but they are persistent: a slightly wrong rule applied to thousands of items for years.
Common valuation methods
- **FIFO (first in, first out):** the oldest purchase costs are assumed to be used first, and the stock on hand is valued at the most recent costs.
- **Weighted average cost:** each item is valued at an average of the purchase costs, updated as new goods arrive.
- **Specific identification:** each item is tracked at its own actual cost, typically for high-value or unique goods.
The right method depends on your business and on the accounting rules you follow. The important thing is to choose one, document it and apply it consistently.
What belongs in the cost
Purchase price, import duties and transport to the warehouse are usually part of the cost, while discounts reduce it. Storage and selling costs generally are not. Check which rules apply to you and apply them in the same way every time.
Old, damaged and slow goods
Goods that are damaged, obsolete or no longer sellable should not be carried at full cost. Review slow-moving items regularly and create a provision or write-down where their value has fallen.
Link valuation to counting
A count that is not matched to a reliable value cannot support the accounts. Make sure the item master data, costs and units are correct before the count, so that quantity differences translate into correct money differences.
Document your policy
A simple illustration
A product is bought in two batches: 100 units at 10 and 100 units at 12. If you sell 100 units, FIFO assumes you sold the first batch at 10, leaving 100 units valued at 12. With weighted average, the cost per unit is 11, so the remaining 100 units are valued at 11. The method changes the reported profit even though the physical stock is identical.
Review the master data
Check that item costs are current, units are consistent and there are no duplicates. Many valuation errors come not from the method but from outdated or wrong data in the item list.
Write down the method, what is included in cost and how provisions are decided. A clear policy makes audits faster and prevents arguments between departments.