Inventory Management for Philippine Retail and F&B Businesses

Inventory is where most retail and F&B businesses' money is tied up. Managing it well means knowing what you have, what it cost, and what's been sold or lost. Managing it poorly means guessing your cost of goods sold, discovering shrinkage only at year-end, and struggling to explain your margins to BIR during an audit.

This guide focuses on the accounting and compliance side of inventory management for Philippine businesses. We'll use two examples throughout: Nena Reyes's sari-sari store in Batangas, and Maria Santos's bakery in Quezon City.

Why Inventory Accounting Matters

Accurate gross margin. Your Profit & Loss is only as good as your cost of goods sold (COGS) figure. If inventory isn't tracked properly, COGS is wrong — and so is everything that follows: gross margin, net income, income tax.

BIR compliance. The BIR requires a physical inventory count at least once a year, and the results must be consistent with your declared COGS and inventory on the balance sheet. An inventory list is a required attachment to your Audited Financial Statements.

Cash flow visibility. Slow-moving inventory is trapped cash. Knowing which products turn over quickly and which sit on shelves for months is essential for smart purchasing decisions.

Theft and spoilage detection. Without a system, you may not notice until you count physically that 15% of your stock is unaccounted for.

Perpetual vs. Periodic Inventory System

The first decision in inventory accounting is the system you use.

Perpetual Inventory System

Every purchase and every sale updates the inventory balance in real time.

• When you buy goods: Inventory account increases
• When you sell goods: Inventory account decreases and COGS increases simultaneously
• Your inventory balance is theoretically accurate at any moment
• Works best with a point-of-sale (POS) system or accounting software with inventory management

Best for: Businesses with a POS system, businesses with moderate SKU counts where tracking per item is feasible, businesses using accounting software.

Periodic Inventory System

You don't track inventory movement continuously. Instead, you count physical inventory at period end (monthly, quarterly, or annually) and compute COGS as:

COGS = Beginning Inventory + Purchases − Ending Inventory

• Simpler to operate
• COGS is only accurate after each count
• You don't know your inventory position between counts
• Traditional bookkeeping (manual books) typically uses this system

Best for: Very small businesses, businesses with simple single-item or few-item inventory, early-stage businesses not yet using accounting software.

Nena's sari-sari store: She uses a periodic system. Every end of month, she counts her goods on hand (softdrinks, noodles, canned goods, snacks) and values them at cost. COGS is derived from the formula above.

Maria's bakery: She uses a perpetual system via Akauntants with a POS integration. Every ingredient used in production is tracked via her production records, and finished goods are tracked through the POS.

Inventory Valuation Methods

Once you know what you have, you need to assign a cost to it. The two methods approved by the BIR and consistent with Philippine Accounting Standards:

First-In, First-Out (FIFO)

The oldest inventory is assumed to be sold first. The cost of goods sold reflects the cost of the earliest purchased items, and ending inventory reflects the most recently purchased items.

Best for: Perishable goods (F&B), items with short shelf life, businesses where physical rotation actually follows "oldest first" logic.

Example — Maria's flour inventory:

FIFO COGS for 130 kg sold:

• First 100 kg at ₱45 = ₱4,500
• Next 30 kg at ₱48 = ₱1,440
• COGS = ₱5,940

Remaining inventory: 70 kg at ₱48 = ₱3,360

Weighted Average Cost (WAC)

A single average cost is computed for all units in inventory, regardless of when they were purchased. The average updates with each new purchase.

Best for: Retail with many identical items, businesses where physical rotation doesn't follow FIFO, businesses with many frequent small purchases.

Example — Nena's sari-sari sardines:

Inventory Accounts in Your Chart of Accounts

Properly structured inventory accounts:

Simple retail businesses (sari-sari, online shop) typically use only 1060 and 5010. F&B businesses need the raw materials, WIP, and finished goods split.

Conducting a Physical Inventory Count

When to Count

• Year-end (mandatory): December 31 for calendar-year businesses. This count becomes the basis for your year-end financial statements and the inventory list submitted with your AFS.
• Monthly (recommended): For F&B and high-turnover retail, monthly counts catch shrinkage and spoilage early.
• Spot counts: Unannounced spot counts at any time are the most effective theft-detection tool.

How to Count

Before counting:

1. Stop receiving new stock for the day of the count (or count goods in transit separately)
2. Organize the storage area so items are countable
3. Prepare the count sheet with pre-listed SKUs and locations

During counting:

1. Teams of two: one counts, one records
2. Count everything — even half-open packages and items in the display area
3. Note damaged or expired items separately

Count sheet columns:

• SKU / Product name
• Location (shelf, freezer, stock room)
• Expected quantity (per system)
• Counted quantity
• Variance
• Unit cost
• Extended cost (qty × unit cost)
• Notes (expired, damaged)

After counting:

1. Calculate variances (counted vs. system expected)
2. Investigate significant variances before recording
3. Record the actual count in your system
4. Compute inventory write-down for items confirmed as unsaleable

Shrinkage and Spoilage Accounting

Shrinkage

Shrinkage is inventory that disappears due to theft, breakage, administrative errors, or evaporation (literally, for liquids). It's the gap between what your system says you should have and what you actually count.

Journal entry for normal shrinkage:

Inventory Write-Down (expense)    ₱2,500
  Merchandise Inventory (asset)           ₱2,500

Normal vs. abnormal shrinkage: Some shrinkage is expected — a few broken bottles, slight weight loss in produce. This is normal shrinkage and goes to COGS or a separate shrinkage expense.

Abnormal shrinkage (large, unexplained losses) suggests theft or a process problem and should be investigated separately. If employee theft is confirmed, the amount may be recoverable from the employee and recorded differently.

Spoilage (F&B)

For bakeries, restaurants, and food manufacturers, spoilage is the cost of ingredients that went bad or finished goods that weren't sold before expiry.

Maria's bakery spoilage policy:

• Bread not sold by end of day is marked down (sold at ₱5 instead of ₱25)
• Bread not sold even at markdown is discarded
• Spoilage rate: approximately 8% of daily production

Journal entry for spoiled goods:

Spoilage Expense (5030)          ₱800
  Finished Goods Inventory (1063)       ₱800

If some spoiled goods are sold at a reduced price:

Cash / AR                        ₱150
  Sales Revenue (at markdown price)     ₱150

And separately:

Spoilage Expense                 ₱650
  Finished Goods Inventory              ₱650
(recording the write-down from cost to markdown price)

Consignment Inventory

If you hold goods for another party (e.g., a supplier delivers on consignment, and you only owe payment when sold), that inventory is not your asset. Do not record it on your balance sheet.

Treatment:

• Consigned goods from suppliers: track in a memo/subsidiary record (not in your asset accounts)
• When consigned goods are sold: record the sale and record the payable to the consignor simultaneously

If you consign your goods to another retailer (you send goods, they sell on your behalf):

• The goods remain your inventory until sold
• Continue tracking them in your inventory at cost
• Recognize revenue only when the retailer reports a sale to the end customer

BIR Requirements for Inventory

Annual Inventory List

Every business with inventory must submit an Inventory List with their Audited Financial Statements (or Annual Income Tax Return for smaller businesses). The list shows:

• Item description
• Quantity on hand at year-end
• Unit cost
• Total cost
• Valuation method used (FIFO, WAC)

Format: BIR does not mandate a specific form, but the list must be signed by the authorized representative.

Consistency in Valuation Method

As mentioned, you must use the same valuation method consistently. If you change methods, disclose it as a change in accounting policy in your financial statements and quantify the effect.

BIR Inventory Audit Triggers

BIR compares your declared COGS to your gross sales. If your gross margin is unusually low (compared to industry benchmarks for your type of business), BIR may question whether you're understating income or overstating COGS.

Typical gross margin benchmarks:

• Sari-sari store: 20–35%
• Bakery: 50–65%
• Clothing retail: 40–60%
• Electronics retail: 10–20%
• Restaurant: 65–75% (on food revenue)

If your declared margins fall significantly outside these ranges, ensure you have solid inventory records to substantiate your COGS.

POS Integration with Accounting

Modern POS systems (Cloudbeds, Mosaic, QuadX, local systems) can integrate with accounting software to automate inventory and COGS recording.

How it typically works:

1. When a sale is rung in the POS, the inventory count decreases (perpetual tracking)
2. The POS sends the sale to your accounting system
3. Accounting records: Credit Revenue, Debit Cash/AR; simultaneously Debit COGS, Credit Inventory
4. No manual journal entry needed for each sale

For Akauntants: POS integration is set up once in Settings → Integrations. Sales and inventory data flow into Akauntants automatically, and your inventory balance and COGS are always current.

Without POS integration, you can upload the daily sales report (CSV from your POS) to Akauntants, or batch-record daily sales at end of day.

Month-End Inventory Checklist

Add these steps to your standard month-end close:

• Conduct physical count (or update perpetual count from POS)
• Compare physical count to system balance; investigate variances
• Record inventory write-down for damaged/expired goods
• Record spoilage entries (F&B)
• Confirm COGS for the month is reasonable (check gross margin)
• Update inventory value for any cost changes (new purchase prices)
• Reconcile inventory sub-ledger to general ledger control account
• Confirm consignment goods are properly excluded from your balance

Inventory management requires consistent attention. A well-maintained perpetual system with monthly physical verification gives you the most accurate financial picture and the strongest position if BIR ever questions your COGS.