Book inventory definition
/What is Book Inventory?
Book inventory is the cost of inventory on hand, as stated in an organization's accounting records. It includes the cost of all types of inventory, including raw materials, work-in-process, finished goods, and merchandise. Book inventory is usually tracked in real time, where the warehouse staff is constantly recording adjustments for received goods, shipped goods, distributions to and from the production area, and counting adjustments. These recordation activities will not always accurately reflect the actual number of units on hand, so the warehouse staff may conduct daily cycle counts to verify that the book balance matches the on-hand balance. Cycle counts involve counting a small proportion of the inventory every day, so that the entire inventory is counted on a regular basis.
Example of Book Inventory
Suppose Ella’s Boutique, a small retail clothing store, wants to calculate its book inventory for the end of the quarter. At the beginning of the quarter, the store’s accounting records show an opening inventory cost of $20,000. During the quarter, Ella purchased additional merchandise costing $15,000. According to the sales records, the cost of goods sold (COGS) for the quarter amounted to $18,000.
To derive the book inventory, Ella’s accountant would use the following formula:
Book Inventory = Opening Inventory + Purchases - Cost of Goods Sold
Substituting the values:
Book Inventory = $20,000 + $15,000 - $18,000
Book Inventory = $17,000
Thus, the book inventory at the end of the quarter would be $17,000. This figure represents the cost of inventory on hand as recorded in Ella’s accounting system, not accounting for any discrepancies that might be found in a physical count, such as shrinkage or theft.
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Reasons for Book Inventory Variances
The current book inventory amount is compared to the actual inventory on hand to see if there are any discrepancies in the accounting records, which can indicate procedural or control problems that should be corrected. Differences between book inventory and actual inventory can have a number of causes, including the following:
The theft of inventory
Inventory receipts that were not recorded in the accounting records
Inventory sales that were not recorded in the accounting records
Inventory that has been recorded using the wrong unit of measure
Inventory that has been recorded using the wrong part number
Inventory that was sent out on consignment, and removed from the accounting records