Where do you put inventory on a balance sheet?

It's important that you know how your business is performing and if you buy and sell inventory items, how profitable they are. The value of your sales and expenses appear on your Profit and Loss report. However, to correctly calculate the profitability of your inventory items, you must also take into account any unsold inventory at the end of any given period. Not including the unsold inventory can create an inflated profit or a loss on your report. You can ensure unsold inventory is included by posting opening and closing inventory journals.

By default, the Profit and Loss Report calculates the gross profit as:

Sales - expenses = gross profit

However, if you post opening and closing inventory journals, the gross profit is calculated as follows:

Opening inventory + expenses - closing inventory = cost of sales

Sales - cost of sales = gross profit

Example calculation

January

• You purchase $10,000 worth of inventory
• You sell $5,000 worth of inventory for $12,000

Gross profit without inventory journals = (sales - expenses) $12,000 - $10,000 = $2,000 profit. However, this doesn't take into account the $4,000 of inventory you have remaining.

The calculation with opening and closing inventory is:

(Opening inventory - closing inventory ) $10,000 - $5,000 = $5,000, this is your cost of sales.

(Sales - cost of sales) $12,000 - $5,000 = $7,000 profit. This takes into account your closing inventory and is a more accurate profit.

February

• You don't purchase any additional inventory.
• You sell the remaining $5,000 worth of inventory for $12,000.

Gross profit without inventory journals = (sales - expenses) $12,000 - $0.00 = $12,000 profit. However, this doesn't take into account the $5,000 of inventory you had left over from January.

The calculation with opening and closing inventory is:

(Opening inventory - closing inventory ) $5,000 - $0 = $5,000, which is your cost of sales.

(Sales - cost of sales) $12,000 - $5,000 = $7,000 profit.

Overall

The profit over the two month period is the same whichever method you use. However, when you post opening and closing inventory, the profitability is accurate for each month.

Create the opening and closing inventory ledger accounts

By default, you already have a balance sheet Inventory ledger account, which is code 1200. In addition to this, you also need to create profit and loss accounts for your opening and closing inventory.

1. Click Settings, Business settings.
2. Under Financial Settings, click Chart of Accounts.
3. Click New Ledger Account and enter the following information.

   Included in Chart	Leave this selected
   Ledger Name	Opening Inventory
   Display Name	Opening Inventory
   Account Number	5200 If code 5200 is already in use, enter a different code. It doesn't matter what code you enter because the category determines where it appears on your reports.
   Category	Direct Expenses
   Visibility	The applicable check boxes are automatically selected when you select a category. No changes are needed.

4. Click Save.
5. To create the closing inventory account, repeat the steps above, except replace the ledger and display name with Closing Inventory and use a different account number, for example 5201. Everything else should be the same.

You've successfully created your opening and closing accounts and are ready to post your journals.

Start of month 1 or your financial year

If you have a value for opening inventory in your balance sheet inventory account code 1200, post a journal to move this to your profit and loss opening inventory account, 5200.

You may not have any values in your balance sheet inventory account, for example, if this is the first month you've purchased any inventory. If you don't, record the purchase as usual, and then post a closing inventory journal as your first journal entry. For more information, see End of month 1 - Closing inventory journal.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal.
   Date *	Enter the date to use for the journal. This doesn't have to be the first day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report show the correct values.
   Ledger Account	Details	Debit	Credit
   Inventory (1200)	Inventory		Value
   Opening inventory (5200)	Opening inventory	Value

3. Click Save.

You've now moved the value of your inventory to the profit and loss account. The balance remains as a debit in the opening balance account, 5200, for the rest of the year and is offset by the value you have in your closing inventory account.

End of month 1 - Closing inventory journal

At the end of the month, post a journal to move the closing inventory value back to the balance sheet inventory, 1200. This is necessary so that the inventory appears as an asset to your company on the Balance Sheet report.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal.
   Date *	Enter the date you want to use for the journal. This doesn't have to be the last day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report show the correct values.
   Ledger Account	Details	Debit	Credit
   Closing inventory (5201)	Closing inventory	Value
   Inventory (1200)	Inventory		Value

3. Click Save.

You can now produce the Profit and Loss report.

Start of month 2 and subsequent months - Opening inventory journal

Post a journal to move the value of the opening inventory from the balance sheet inventory account, 1200, to the profit and loss account, 5201.

Note: The opening inventory value for month 2 is the closing inventory value for month 1.

1. Go to Adjustments, Journals, New Journal.
2. Enter the information for your journal entry:

   Reference *	Enter a reference for the journal.
   Date *	Enter the date to use for the journal.
   Ledger Account	Details	Debit	Credit
   Inventory (1200)	Inventory		Value
   Closing Inventory (5201)	Closing inventory	Value

3. Click Save.

Repeat these steps each month that you want to record opening inventory.

End of month 2, subsequent months, or the end of your financial year - Closing inventory journal

Post a journal to move the value of the opening inventory from the profit and loss account, 5201, to the balance sheet inventory account 1200.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal.
   Date *	Enter the date to use for the journal. This doesn't have to be the last day of the month. As long as the date is in the correct month, the Profit and Loss report and the Balance Sheet report show the correct values.
   Ledger Account	Details	Debit	Credit
   Closing inventory (5201)	Closing inventory		Value
   Inventory (1200)	Inventory		Value

3. Click Save.

At the end of your financial year, when you produce a report dated in the new year, the values are automatically cleared from the opening and closing inventory accounts to the profit and loss account, 3100. This value appears in the Equity section of the Balance Sheet report. This leaves your unsold inventory as an asset on ledger account 1200. You can then follow the steps in the Start of month 1 or your financial year section to start posting opening and closing inventory for the new year.