Inventory refers to the goods your business holds for sale or uses in production. It is a current asset on the balance sheet and its cost flows to COGS when sold.
Inventory management is critical for any business that sells physical products. Inventory appears on the balance sheet as a current asset and includes raw materials (for manufacturers), work in progress (partially completed goods) and finished goods (ready for sale). When inventory is sold, its cost moves from the balance sheet to the profit and loss statement as Cost of Goods Sold (COGS). The method used to value inventory affects your profit: FIFO (First In, First Out) assumes the oldest stock is sold first, LIFO (Last In, First Out) assumes the newest stock is sold first (not permitted under IFRS), and weighted average cost calculates an average cost across all units. Accurate inventory tracking is essential for correct COGS calculation, profit reporting and stocktake reconciliation. Inventory shrinkage (theft, damage, spoilage) must be identified and recorded. SortBooks helps track inventory-related transactions in Xero, ensuring purchases are correctly categorised and COGS calculations are accurate.
SortBooks helps with the bookkeeping behind inventory by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing inventory by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
COGS represents the direct costs of producing or purchasing the goods your business sells. It includes raw materials, direct labour and manufacturing overhead but not selling or administrative expenses.
Current assets are resources your business expects to convert to cash, sell or consume within 12 months. They include cash, accounts receivable, inventory and prepaid expenses.
The balance sheet is a financial statement that shows your business's assets, liabilities and equity at a specific point in time. It follows the equation: Assets = Liabilities + Equity.
Gross profit is your revenue minus the cost of goods sold (COGS). It shows how much money remains from sales after covering direct production or purchasing costs.
A stocktake (or physical inventory count) is the process of physically counting and valuing all inventory on hand to verify that accounting records match actual stock levels.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.