Essential Inventory and Payroll Management Practices

Inventory Management Fundamentals

Inventory refers to a company's assets acquired for resale in their purchased state or for transformation into other goods sold as finished products. A significant portion of a company's assets is considered inventory if it is company property and intended for sale.

Inventory Classification

• Purchased Goods from Third Parties
• Finished Products
• Products in Process
• Raw Materials
• Factory Supplies
• Packaging Material
• Merchandise in Transit

Internal Control for Inventory

Inventory often represents the highest volume category of assets, making robust internal controls crucial:

1. Goods must be protected against theft and losses by keeping them safe in secure locations, accessible only to authorized personnel.
2. Upon entry into the store, goods must be weighed, counted, or measured, and the results compared with the accompanying documentation.
3. Goods should only be released upon presentation of duly authorized firm orders.
4. Perpetual inventory records must be maintained for quantities and values of all merchandise.
5. Inventory records should reconcile with the respective control account.
6. Personnel responsible for auxiliary storage records must be separate from those in charge of guarding the goods.
7. The subsidiary ledger for inventory should be periodically reviewed to identify obsolete or slow-moving goods.
8. A physical count of all inventory must be conducted, and the results compared with the subsidiary ledger accounts and the respective control account.

Inventory Systems Explained

Periodic Inventory System

Used mostly by small and medium enterprises, this system only allows knowing the inventory amount after a physical count is performed on a specific date and then assessed. It is usually performed only once a year at the end of the accounting period. This system does not allow knowing the gross profit or loss at the time of each sale.

Perpetual Inventory System

This system allows determining the physical quantity and cost of each inventory item at any time. It is easy to manage because inventory is debited when goods are purchased and credited when a sale is made, continuously updating the balance with each transaction.

Payroll Management Essentials

Payroll refers to the compensation provided to human resources for their services within an economic entity. Companies, as legal entities, utilize human, natural, and capital resources, and the compensation for human resources is a fundamental aspect of their operations.

Internal Control for Payroll

1. Recruitment, salaries payable, payroll deductions, overtime, and other special payments must be approved by authorized personnel.
2. Each worker's record must remain inaccessible to individuals involved in payroll preparation and approval.
3. Time clocks or similar tracking systems must be used to monitor time worked.
4. Functions must be separated for: timekeeping, payroll preparation, payroll disbursement, hiring, and termination.