Stock Valuation Methods

Stock Valuation Methods

Stock valuation methods determine how the cost of inventory is calculated when items are sold. EquiBillBook supports multiple valuation methods to suit different business needs. This guide explains each method and how to choose the right one for your business.

What is Stock Valuation?

Stock valuation is the process of:

• Assigning a cost value to inventory items
• Calculating the cost of goods sold (COGS)
• Determining inventory asset value on the balance sheet
• Impact on profit margins and financial reporting

Available Valuation Methods

EquiBillBook supports three main stock valuation methods:

1. FIFO (First-In-First-Out)

How it works:

• Assumes the oldest stock is sold first
• Cost of oldest purchases is used for COGS
• Remaining stock is valued at newer purchase prices

Best for:

• Perishable goods (food, medicines)
• Items with expiry dates
• Businesses where oldest stock should be sold first
• Compliance with certain accounting standards

Advantages:

• Matches physical flow of goods
• Prevents stock from becoming obsolete
• Generally accepted accounting method

2. LIFO (Last-In-First-Out)

How it works:

• Assumes the newest stock is sold first
• Cost of newest purchases is used for COGS
• Remaining stock is valued at older purchase prices

Best for:

• Non-perishable goods
• Items that don't expire
• Businesses where stock doesn't deteriorate
• Tax optimization in some scenarios

Advantages:

• May reduce tax liability in inflationary periods
• Matches current market costs to revenue

Note: LIFO may not be allowed in some countries for accounting purposes.

3. Average Cost (Weighted Average)

How it works:

• Calculates average cost of all stock
• Uses weighted average based on quantities purchased
• Same average cost used for all sales until new purchase
• Recalculates average when new stock is purchased

Best for:

• Most businesses with standard inventory
• Items with similar characteristics
• Simplified cost tracking
• When exact lot tracking is not critical

Advantages:

• Simplifies cost calculations
• Smooths out price fluctuations
• Easy to understand and implement
• Reduces complexity in inventory management

Setting Stock Valuation Method

To configure the valuation method:

1. Navigate to Settings → Item Settings
2. Find Stock Accounting Method or Stock Valuation Method
3. Select your preferred method (FIFO, LIFO, or Average Cost)
4. Save the settings
5. The method applies to all items with stock tracking enabled

Impact on Financial Reports

Different methods affect:

• Cost of Goods Sold (COGS): Different methods calculate different COGS
• Gross Profit: Varies based on COGS calculation
• Inventory Value: Balance sheet inventory value differs by method
• Tax Liability: Can impact taxable income

Example Comparison

Consider this scenario:

• Purchase 100 units at ₹10 each (Total: ₹1,000)
• Purchase 100 units at ₹15 each (Total: ₹1,500)
• Sell 100 units

FIFO: COGS = ₹1,000 (oldest stock), Remaining = ₹1,500

LIFO: COGS = ₹1,500 (newest stock), Remaining = ₹1,000

Average: COGS = ₹1,250 (average of ₹12.50), Remaining = ₹1,250

Changing Valuation Method

Important considerations:

• Changing methods mid-year may require accounting adjustments
• Consult with your accountant before changing methods
• Some methods may not be allowed in your country
• Changes may require restating previous periods
• Document the reason for method change

Multi-Branch Considerations

When using multiple branches:

• Valuation method applies consistently across all branches
• Stock transfers maintain cost basis
• Consolidated reports use the same method
• Ensure consistency for accurate reporting

Best Practices

• Choose a method that matches your business type
• Consider accounting and tax regulations in your country
• Consult with your accountant before selecting a method
• Maintain consistency once a method is chosen
• Document your method selection and rationale
• Review method appropriateness periodically
• Ensure compliance with accounting standards

Compliance and Regulations

Be aware of:

• Local accounting standards (GAAP, IFRS, etc.)
• Tax regulations regarding inventory valuation
• Industry-specific requirements
• Audit requirements for method selection
• Documentation requirements for method changes

Need Help?

If you need assistance with stock valuation:

• Review your business requirements and inventory type
• Consult with your accountant or financial advisor
• Check local accounting and tax regulations
• Understand the impact on your financial reports
• Contact support for technical assistance with method configuration

Selecting the right stock valuation method is crucial for accurate financial reporting and inventory management. Choose a method that aligns with your business operations and complies with applicable regulations.