As with all businesses, a manufacturing company uses a sequence of events known as just in time to manufacture and a sequence of events known as an accounting cycle to prepare financial statements. Being a manufacturer brings some specific requirements, notably the need to use the accrual method in most cases, and the need to find a system to value inventory.
Because a manufacturer carries inventory, it will normally be required to use the accrual rather than cash method when preparing accounts for tax purposes. Accrual means recording transactions at the time money becomes owed, even if this isn’t when it’s paid. For example, a sale on credit to a customer is listed when the goods are delivered, not when the customer finally pays. To reflect this method, the accountants must make adjusting entries to the ledgers. This means adding entries that don’t show up in the record of transactions, which is done by referring to documents such as invoices rather than cash records.
When tracking inventory — both when matching costs to expenses, and in valuing the company’s assets at the end of the accounting period — a company must place a value on each item. This can cause confusion if the company has multiple units of an item, but bought some of them at different prices. The solution is to use one of two consistent methods of valuation. One is First in First Out by which, for accounting purposes, each sold unit is treated as if it were the unit in stock the longest, and valued appropriately. The contrasting Last in First Out (LIFO) means treating each sold unit as if it were the most recently added.