Inventory bookkeeping basics

Learn the core concepts and terminology of inventory bookkeeping.

If you’re new to inventory systems, some of the accounting terms and processes can feel complex at first. This guide explains the fundamentals of inventory bookkeeping and how Craftybase simplifies it for product-based businesses.

What Is Inventory Bookkeeping?

Inventory bookkeeping is the process of tracking stock levels and assigning value to that stock over time. It’s different from simple income/expense accounting because your materials and finished goods are considered business assets until sold.

Rather than claiming all expenses up front, you’ll track the flow of inventory from purchase to sale — which gives you a clearer picture of true costs and profit.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the calculated cost of materials used in the products you’ve sold. It’s the foundation for understanding your profitability and is typically required for inventory-based tax reporting.

Craftybase automatically calculates your COGS by tracking the materials consumed in each sale.

Why it matters:

• Aligns your expenses with your actual sales
• Supports accurate tax filings
• Provides insight into product-level profitability

Example:

If you purchase $2,000 in materials but only use $1,000 to manufacture and sell products this year, only that $1,000 is included in your expense reports. The rest remains as inventory.

Weighted Average Cost

Craftybase uses the weighted average cost method to calculate your unit costs.

This method updates your material and product costs automatically whenever stock is added or used, creating a rolling average that reflects your inventory value in real time.

Why use it:

• Avoids the need to track exact purchase sources (unlike FIFO or LIFO)
• Smooths out cost fluctuations
• Compliant with IRS and GAAP standards for manufacturing inventory

Accrual-Based Reporting

Craftybase uses the accrual method of accounting, which means:

• Purchases are recorded on the date materials are received (not when paid)
• Sales are recorded when the order is placed or shipped (not when payment is collected)

This ensures that your costs and income are recorded in the correct period for accurate COGS and profit calculations.

Perpetual Inventory Tracking

Craftybase is a perpetual inventory system. This means it continuously records every change in stock — purchases, manufactures, adjustments, and orders — rather than relying on a year-end stocktake.

Benefits:

• Real-time visibility into your inventory levels and value
• Accurate COGS at any point in time
• Reduces the need for manual tracking and reconciliation

Summary of Key Concepts

Want to learn more?

Check out these related tutorials:

• Backdating Past Data in Craftybase

Still have questions? Email our support team — we're happy to help.