Inventory bookkeeping for small businesses
If you sell products, inventory is usually the biggest number on your balance sheet and the main driver of your profit. Here is how it moves through your books, with simple entries you can follow.
Why inventory changes your bookkeeping
When you buy stock to resell, the money you spend is not an expense yet. It becomes an asset, inventory, because you still own the goods. The cost only becomes an expense, called cost of goods sold (COGS), when you sell the item.
This matters because it matches each sale with the cost of the item sold. If you expensed every purchase the day you paid for it, a month where you stocked up would look like a loss and the next month would look unusually profitable.
Tax rules for inventory are different from bookkeeping rules, and some small businesses qualify for simplified tax treatment. Keep accurate inventory records either way, and ask your tax professional which method applies to you.
The accounts that matter
| Account | Type | What it holds |
|---|---|---|
| Inventory | Asset | The cost of products you own and have not sold yet |
| Cost of goods sold | Expense | The cost of the products you sold this period |
| Sales | Income | What customers paid or owe you for products |
| Accounts payable | Liability | Supplier bills you have not paid yet |
| Inventory adjustments or shrinkage | Expense | Losses from damage, theft or counting differences |
If you sell more than one kind of product, you can keep one inventory account and track quantities and costs per item in your inventory system, rather than creating an account for every product.
Recording purchases and sales
Say you buy 100 units of a product at $8 each on supplier credit, then sell 40 of them for $15 each.
| Event | Debit | Credit | Amount |
|---|---|---|---|
| Buy 100 units at $8 | Inventory | Accounts payable | $800 |
| Sell 40 units at $15 | Cash or accounts receivable | Sales | $600 |
| Record the cost of the 40 units | Cost of goods sold | Inventory | $320 |
| Pay the supplier | Accounts payable | Cash | $800 |
After these entries, inventory holds $480 (60 units at $8), and the sale shows $280 of gross profit ($600 of sales minus $320 of cost).
Periodic or perpetual tracking?
There are two ways to keep the inventory account up to date.
| Periodic | Perpetual | |
|---|---|---|
| How COGS is found | Count stock at the end of the period: beginning inventory + purchases − ending inventory | Recorded with every sale |
| Stock levels between counts | Unknown until you count | Always visible |
| Effort | Low day to day, heavy at count time | Needs an inventory system, but counts become checks |
| Best for | Very small catalogs and low volume | Most businesses that reorder regularly |
Even with perpetual tracking, count your stock at least once a year, and count fast-moving or high-value items more often. Counts catch mistakes, damage and theft that the system cannot see.
Freight, duties and other costs
Costs you pay to get products to your warehouse and ready to sell, such as inbound freight, import duties and customs brokerage, are generally part of the inventory cost rather than separate expenses. The total is called landed cost. Our landed cost guide shows how to spread shared shipping costs across products.
Shipping you pay to deliver orders to customers is different. Many businesses record it as a selling expense. Pick one treatment and use it consistently so your margins stay comparable month to month.
Counting stock and recording adjustments
When a count finds fewer units than your records show, record the difference so the books match reality. If your records show 60 units at $8 and you count 57, the entry is:
Debit inventory shrinkage $24 · Credit inventory $24
Investigate large or repeated differences before adjusting. They often point to a receiving mistake, a sale recorded twice, or a supplier short-shipment you can still claim.
A monthly routine for inventory businesses
- Record every supplier bill and receipt, including freight and duty bills that arrive after the goods.
- Make sure every sale and refund is recorded, with the cost of the items sold.
- Count high-value and fast-moving items, and record any adjustments.
- Check that the inventory balance in your books matches the value of stock in your inventory records.
- Reconcile bank and card accounts. Our bank reconciliation guide walks through it.
- Review gross margin by product or category, and reorder before best sellers run out. The reorder point calculator helps.
For the full end-of-month list, see the month-end close checklist.
Common inventory bookkeeping mistakes
- Expensing every stock purchase immediately, which distorts monthly profit.
- Leaving freight and duties out of product cost, which overstates margins.
- Never counting, so losses build up unnoticed.
- Recording sales without the matching cost of goods sold.
- Mixing personal purchases with business stock.
Common questions
Do I need inventory accounting if I sell online?
Yes, if you buy and hold stock to resell. Where you sell does not change how inventory and cost of goods sold work in your books.
How often should I count inventory?
At least once a year for everything, and more often for high-value or fast-moving items. Many businesses count a small group of items every week or month, called cycle counting.
Keep your books this way without the busywork
YourAILedger tracks inventory, purchase orders and suppliers, reconciles imported bank statements and guides your month-end close. Plans start at $29 a month.
No credit card required.
This guide is general education, not tax, legal or accounting advice. Rules vary by business and location, so confirm your situation with a qualified professional.