Inventory valuation refers to how you value your stock. It’s a very important aspect of a business as the inventory can be the biggest asset of a company.
Inventory valuation implies two main choices:
- The cost method you use to value your goods (standard, fifo, avco)
- The way you record this value into your accounting books (manually or automatically)
Those two concepts are explained in the sections below.
Costing Methods: Standard, FIFO, AVCO
The costing method is defined in the product category. There are three options available. Each of them is explained in detail below.
- Standard Price
Operation Unit Cost Qty On Hand Delta Value Inventory Value €10 0 €0 Receive 8 Products at €10 €10 8 +8*€10 €80 Receive 4 Products at €16 €10 12 +4*€10 €120 Deliver 10 Products €10 2 -10*€10€20 Receive 2 Products at €9 €10 4 +2*€10 €40 In Standard Price, any product will be valued at the cost that you defined manually on the product form. Usually, this cost is an estimation based on the material and labor needed to obtain the product. This cost must be reviewed periodically.
- Average Price
Operation Unit Cost Qty On Hand Delta Value Inventory Value €0 0 €0 Receive 8 Products at €10 €10 8 +8*€10 €80 Receive 4 Products at €16 €12 12 +4*€16 €144 Deliver 10 Products €12 2 -10*€12€24 Receive 2 Products at €6 €9 4 +2*€6 €36 In AVCO (Average Cost), each product has the same value and this value is the average purchase cost of the product. With this costing method, the cost of the product is recomputed as each receipt.
The average cost does not change when products leave the warehouse.
- FIFO
Operation Unit Cost Qty On Hand Delta Value Inventory Value €0 0 €0 Receive 8 Products at €10 €10 8 +8*€10 €80 Receive 4 Products at €16 €12 12 +4*€16 €144 Deliver 10 Products €16 2 -8*€10-2*€16€32 Receive 2 Products at €6 €11 4 +2*€6 €44 In FIFO (First In First Out), the products are valued at their purchase cost. When a product leaves the stock, that’s the “First in, first out” rule that applies.
Pay attention, that this is a financial FIFO. The first value “in” is the first value “out”, no matter the storage location, warehouse or serial number.
FIFO is advised if you manage all your workflows into Odoo (Sales, Purchases, Inventory). It suits any kind of users.
Inventory Valuation: Manual or Automated
There are two ways to record your inventory valuation in your accounting books. As the costing method, this is defined in your product category. Those two methods are detailed below.
It is important to also note that the accounting entries will depend on your accounting mode: it can be continental or anglo-saxon. In continental accounting, the cost of a good is taken into account as soon as the product is received in stock. In anglo-saxon accounting, the cost of a good is only recorded as an expense when this good is invoiced to a final customer. In the tables below, you can easily compare those two accounting modes.
Usually, based on your country, the correct accounting mode will be chosen by default. If you want to verify your accounting mode, activate the Developer mode and open your accounting settings.
Manual Inventory Valuation
In this case, goods receipts and deliveries won’t have any direct impact on your accounting books. Periodically, you create a manual journal entry representing the value of what you have in stock. To know that value, go in .
This is the default configuration in Odoo and it works out-of-the-box. Check following operations and find out how Odoo is managing the accounting postings.
Continental Accounting
- Vendor Bill
Debit Credit Assets: Inventory 50 Assets: Deferred Tax Assets 4.68 Liabilities: Accounts Payable 54.68 - Configuration:
- Purchased Goods: defined on the product or on the internal category of related product (Expense Account field)
- Deferred Tax Assets: defined on the tax used on the purchase order line
- Accounts Payable: defined on the vendor related to the bill
- Goods Receptions
- No Journal Entry
- Customer Invoice
Debit Credit Revenues: Sold Goods 100 Liabilities: Deferred Tax Liabilities 9 Assets: Accounts Receivable 109 - Configuration:
- Revenues: defined on the product or on the internal category of related product (Income Account field)
- Deferred Tax Liabilities: defined on the tax used on the invoice line
- Accounts Receivable: defined on the customer (Receivable Account)
The fiscal position used on the invoice may have a rule that replaces the Income Account or the tax defined on the product by another one.
- Customer Shipping
- No Journal Entry
- Manufacturing Orders
- No Journal Entry
At the end of the month/year, your company does a physical inventory or just relies on the inventory in Odoo to value the stock into your books.
Create a journal entry to move the stock variation value from your Profit&Loss section to your assets.
| Debit | Credit | |
|---|---|---|
| Assets: Inventory | X | |
| Expenses: Inventory Variations | X |
If the stock value decreased, the Inventory account is credited and te Inventory Variations debited.
Anglo-Saxon Accounting
- Vendor Bill
Debit Credit Assets: Inventory 50 Assets: Deferred Tax Assets 4.68 Liabilities: Accounts Payable 54.68 - Configuration:
- Purchased Goods: defined on the product or on the internal category of related product (Expense Account field)
- Deferred Tax Assets: defined on the tax used on the purchase order line
- Accounts Payable: defined on the vendor related to the bill
- Goods Receptions
- No Journal Entry
- Customer Invoice
Debit Credit Revenues: Sold Goods 100 Liabilities: Deferred Tax Liabilities 9 Assets: Accounts Receivable 109 - Configuration:
- Revenues: defined on the product or on the internal category of related product (Income Account field)
- Deferred Tax Liabilities: defined on the tax used on the invoice line
- Accounts Receivable: defined on the customer (Receivable Account)
The fiscal position used on the invoice may have a rule that replaces the Income Account or the tax defined on the product by another one.
- Customer Shipping
- No Journal Entry
- Manufacturing Orders
- No Journal Entry
At the end of the month/year, your company does a physical inventory or just relies on the inventory in Odoo to value the stock into your books.
Then you need to break down the purchase balance into both the inventory and the cost of goods sold using the following formula:
Cost of goods sold (COGS) = Starting inventory value + Purchases – Closing inventory value
To update the stock valuation in your books, record such an entry:
| Debit | Credit | |
|---|---|---|
| Assets: Inventory (closing value) | X | |
| Expenses: Cost of Good Sold | X | |
| Expenses: Purchased Goods | X | |
| Assets: Inventory (starting value) | X |
Automated Inventory Valuation
In that case, when a product enters or leaves your stock, an accounting entry will be automatically created. This means your accounting books are always up-to-date. This mode is dedicated to expert accountants and advanced users only. As opposed to periodic valuation, it requires some extra configuration & testing.
First, you need to define the accounts that will be used for those accounting entries. This is done on the product category.
Continental Accounting
Configuration:
- Accounts Receivable/Payable: defined on the partner (Accounting tab)
- Deferred Tax Assets/Liabilities: defined on the tax used on the invoice line
- Revenues/Expenses: defined by default on product’s internal category; can be also set in product form (Accounting tab) as a replacement value.
- Inventory Variations: to set as Stock Input/Output Account in product’s internal category
- Inventory: to set as Stock Valuation Account in product’s internal category
Anglo-Saxon Accounting
Configuration:
- Accounts Receivable/Payable: defined on the partner (Accounting tab)
- Deferred Tax Assets/Liabilities: defined on the tax used on the invoice line
- Revenues: defined on the product category as a default, or specifically to a specific product.
- Expenses: this is where you should set the “Cost of Goods Sold” account. Defined on the product category as a default value, or specifically on the product form.
- Goods Received Not Purchased: to set as Stock Input Account in product’s internal category
- Goods Issued Not Invoiced: to set as Stock Output Account in product’s internal category
- Inventory: to set as Stock Valuation Account in product’s internal category
- Price Difference: to set in product’s internal category or in product form as a specific replacement value