Inventory valuation methods (kardex)

Inventory valuation methods (kardex)

For a small business, the merchandise in the warehouse is usually its most valuable asset: money already invested that has not yet turned into sales. Knowing what that inventory is worth is not an accounting luxury but a daily necessity for setting prices, calculating profits, and filing taxes. Because products are bought at different prices throughout the year, the question "how much is what I have worth?" has no single answer: it depends on the valuation method you apply, and that method is applied movement by movement in the kardex.

In this article we will look at what the kardex is, what the three most used methods consist of (FIFO, LIFO, and weighted average cost), how each one shows up in the record, and which one suits a small business.

What is the kardex?

The kardex is the chronological, product-by-product record of movements: the entries (purchases, returns, received transfers) and the exits (sales, shrinkage, sent transfers). For each movement you record the date, the concept, the third party, the units that come in and go out, the balance that remains, and the unit value of the operation.

Think of the kardex as the complete history of the product in your warehouse, while the stock report is only a snapshot of the moment. Without a well-kept kardex, you do not know at what cost each unit came in or how much is left after each sale. Key clarification: the kardex does not value inventory by itself; it is the book where movements are recorded. The valuation method is the rule that decides at what cost each unit goes out and how the remaining stock is valued.

What is a valuation method?

It is an accounting rule for assigning cost to merchandise when the purchase price changes. Suppose you buy 100 units at 10,000 and, two weeks later, another 100 at 12,000. When you sell 150, what is their cost: that of the first ones, the last ones, or a mix of both? Each method answers differently, and that answer changes your cost of sales, your profit for the period, and the value of your ending inventory.

Let us look at the three methods with a simple example so you can see their effect on the kardex. Case: on January 2, 10 units come in at 1,000; on January 10, 10 more come in at 1,200; on January 15, 12 units go out.

FIFO (first in, first out)

With FIFO, merchandise leaves in the order it arrived: the first units purchased are the first ones sold. The inventory that remains is valued at the most recent costs, closer to the current replacement price.

In the example, the exit of 12 units is costed with the 10 units at 1,000 and 2 units at 1,200: (10 x 1,000) + (2 x 1,200) = 12,400. The kardex shows the exit for 12,400 and a balance of 8 units at 1,200 each (9,600 in total).

• Advantage: ending inventory stays close to the current price, and the method is accepted by most accounting and tax standards.
• Disadvantage: with inflation, the cost of sales is understated, and accounting profit and taxes are inflated.
• Rule: old costs go out first; what remains is the most recent.

LIFO (last in, first out)

With LIFO, the opposite is assumed: the last units purchased are the first ones to go out, and what remains in the warehouse is valued at the oldest costs.

In the same case, the exit takes 10 units at 1,200 and 2 at 1,000: (10 x 1,200) + (2 x 1,000) = 14,000. The kardex records the exit for 14,000 and leaves a balance of 8 units at 1,000 (8,000 in total).

• Advantage: with inflation, it charges the higher recent costs to the sale and reduces reported profit and taxes.
• Disadvantage: ending inventory stays at old prices, and the method is not accepted in several countries under IFRS, nor in Colombia for accounting purposes.
• Rule: new costs go out first; what remains is the oldest.

Weighted average cost

This method does not chase which unit went out first: it blends all costs and calculates an average unit value that is updated with every entry. It is the method most used by small businesses because of its simplicity and because it smooths out price changes.

With 20 units that cost 22,000 in total, the average is 22,000 / 20 = 1,100 per unit. The exit of 12 units is costed at 1,100: 12 x 1,100 = 13,200, leaving 8 units at 1,100 (8,800). If 10 units come in at 1,300, the average is recalculated: (8 x 1,100 + 10 x 1,300) / 18 = 1,211, approximately.

• Advantage: easy to understand and operate, hard to manipulate, and realistic when prices change constantly.
• Disadvantage: under strong inflation it drifts away from the replacement price and requires recalculating the unit value at every entry.
• Rule: each purchase blends the cost; until the next entry, every exit carries the same unit value.

Comparison table of the three methods

Which one suits a small business?

For a small business, the practical recommendation is almost always the weighted average cost. The reason is operational: the method must be sustainable day to day without depending on an accountant for every movement. The average requires a single calculation per entry, gives one unit value, and avoids arguing about which physical batch went out first — something almost impossible with fungible goods such as grains, spare parts, or groceries.

Furthermore, under IFRS, LIFO is not accepted for accounting purposes, and FIFO requires batch tracking that few micro businesses can maintain. So, with fewer than 50 employees and a buy-and-resell business, the weighted average is the balanced option: it complies with the standard, it is defensible before the tax authority, and it does not complicate warehouse operations.

The method in the kardex with a program

Keeping these methods by hand, in notebooks or spreadsheets, is slow and error-prone when a product accumulates dozens of movements per month. An inventory program does that work for you. Kardex Tauro, for example, records every entry and every exit in the product's kardex and, when you register a purchase, it updates the average cost automatically, so the next sale is costed at the correct value without you having to calculate anything. Because the kardex remains as an immutable history, you can always review what came in, what went out, at what cost, and with what balance the product was left.

Understand what lies behind those numbers: the program applies the weighted average rule for you, but the decision to use it rather than FIFO or LIFO is yours, ideally with your accountant's approval, because it affects your cost of sales, your profit, and your taxes.

Conclusion

Valuing inventory is not a year-end formality: it is a decision made with every purchase and every sale. The kardex is the record where that decision becomes visible, and the method defines the cost that goes out, the balance that remains, and the profit you report. For most small businesses, the weighted average is the most sensible option because of its simplicity and regulatory acceptance.

If you want to stop calculating averages by hand and keep the kardex of every product always up to date, try Kardex Tauro: record your purchases and sales and let the program do the valuation for you, with a complete and organized history ready whenever you need it.