There are generally two different methods to do accounting, accrual and cash. Each business will need to decide ahead of time which method best suits them.
InventoryLab automates the accrual method if you are listing through our application. Our opinion is that it’s best to use the accrual method with InventoryLab, but you can certainly use either method of accounting with the application, and we recommend consulting with a CPA to decide which one is best for you. We will outline the two methods below in greater detail.
The Accrual Method
The accrual method is a method of accounting in which your cost of goods is tracked for each unit individually. This method of accounting only accounts for cost of goods when they are sold, and before the units are sold they are treated as an asset instead of an expense.
If you choose to use this method, you will need to add your price per unit to your inventory listings and never treat your purchases as an expense. InventoryLab will show you inventory values at the bottom of the active inventory page.
InventoryLab allows for automation of this method if you are entering your cost per unit into Stratify on the Inventory pages or while listing.
- Shows the best picture of how your business is profiting and growing.
- Allows you to get the most out of IL as it automates most of the process.
- Allows you to match up expenses with income. For example, you can see your net profit for any order ID or MSKU at any time. If you were doing the cash method, none of this analysis is really possible.
- Does a poor job of tracking cash flow.
The Cash Method
The cash method of accounting refers to a method in which the business is accounting for items when they are purchased, rather than when they are sold.
If you are using this method of accounting, you should not track your costs while you are listing and you should not account for your costs in the Inventory pages of Stratify either. Instead, you are going to want to account for your items on the day they are purchased and record the total purchase as an expense.
- The main advantage of the cash method is that it is great for tracking cash flow.
- Very simple to implement and maintain.
While this method is far more simple than the accrual method since you are not accounting for each price per unit, it does have many disadvantages.
- Can not match up income to expenses on a precise level. For example, with the accrual method, you can see your profit for any given order ID. With the cash method, the cost is already counted as an expense long before it sells, so you can only see your gross profits per order ID.
- Can not track net profitability on an item level.
- Can not track and analyze business growth in terms of true net profit (since you are only tracking money in/money out).