How inventory is valued

What is inventory valuation?

Inventory valuation is the process of assigning a monetary value to the goods you hold in stock. This value is critical because it affects your financial statements — specifically your balance sheet and profit & loss — and determines how much profit you report when you sell those items.

Why it matters

The price you originally paid for an item is often different from the price you sell it for, and costs can vary over time. Usystems tracks the actual cost of each unit so that when you sell or use an item, the system correctly records which cost applies. This ensures your financial reports show accurate profit and your inventory balance reflects real economic value.

How it works in Usystems

Usystems uses Weighted Average Cost (WAC) to value inventory. Here's how:

• Purchase tracking: Every time you receive inventory — whether from a purchase order, cash purchase, or transfer — the system records the unit cost you paid.
• Running average: The system calculates a weighted average cost based on all units in stock and their purchase prices. When you have 10 units at 100 AFN and receive 5 units at 120 AFN, the new average cost is 107 AFN per unit (approximately).
• Cost assignment: When you sell, issue, or consume inventory, the system deducts units using this average cost. This cost (not the selling price) is recorded as your Cost of Goods Sold (COGS) on your profit & loss statement.
• Revaluation: If you perform a physical count and update quantities, the system recalculates the weighted average cost for remaining stock.

Where you see it

You encounter inventory valuation in several places:

• Inventory list — The "Value" column shows each item's current stock value (quantity × weighted average cost). Open in Usystems

• COGS on sales documents — When you create an invoice or sales receipt, the line item shows both the selling price and the cost of goods sold.

• Balance sheet and financial reports — Your inventory balance is listed at its weighted average value. Open in Usystems

• Valuation adjustments — If a physical count reveals discrepancies, you post an adjustment that recalculates the weighted average cost for that item.

Common scenarios

Scenario 1: Cost changes over time You buy 100 units of medicine at 50 AFN each, then 50 units at 60 AFN. Your weighted average cost is now 53.33 AFN per unit. When you sell 30 units on an invoice, the system records 30 × 53.33 = 1,600 AFN as COGS, not the selling price.

Scenario 2: Phased arrival with different costs In a manufacturing business, you receive raw materials in batches from different suppliers at different unit costs. The weighted average keeps a single, fair cost for all units regardless of source, simplifying profit calculations.

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