Why inventory valuation matters
Inventory valuation directly affects your profit and loss statement, balance sheet, and tax liability. Getting it wrong means inaccurate financial reports and potential compliance issues with GST.
Common valuation methods
Indian businesses typically use one of three methods:
- FIFO (First In, First Out) — oldest stock is sold first. Works well for perishable goods.
- LIFO (Last In, First Out) — newest stock is sold first. Less common in India.
- Weighted Average Cost (WAC) — the average cost of all units in stock. Most popular for Indian trading and manufacturing businesses.
How Weighted Average Cost works
WAC is calculated by dividing the total cost of goods available for sale by the total number of units available. Every time you purchase new stock at a different price, the average cost is recalculated.
For example: if you have 100 units at Rs. 10 each (Rs. 1,000 total) and purchase 50 more at Rs. 12 each (Rs. 600), your WAC becomes Rs. 1,600 / 150 = Rs. 10.67 per unit.
WAC and GST
Under GST, the value of taxable supply is generally the transaction value. However, for stock transfers between branches or for self-consumption, you may need to use the market value or the cost of production. WAC provides a reliable, auditable cost basis for these scenarios.
How ReadyBooks.ai handles WAC
ReadyBooks.ai automatically calculates WAC for every stock item. When you record a purchase, the WAC is recalculated. When you create a sales invoice, the cost of goods sold is based on WAC. This flows through to your P&L, inventory valuation report, and balance sheet — all automatically.