Start by setting up separate accounts in your chart of accounts. You need at least three inventory accounts: raw materials, work-in-progress, and finished goods. Raw materials holds the cost of everything you purchase to make products. Work-in-progress holds costs during production. Finished goods holds the cost of completed products ready for sale. These three accounts track the full lifecycle of your inventory and feed directly into your cost of goods sold when products are sold.

The flow works like this. When you buy materials, the cost hits your raw materials account. When production pulls those materials for a job or batch, you transfer the cost from raw materials to work-in-progress. You also add labor and overhead costs to work-in-progress during production. When the product is complete, the total cost moves to finished goods. When you sell the product, that cost becomes cost of goods sold on your income statement.

Bills of materials make this work at scale. A bill of materials defines exactly what raw materials and quantities go into each finished product. If you make custom cabinets, your bill of materials for a standard base cabinet might include sheet goods, hardware, finish, and fasteners with specific quantities and costs. When you complete a cabinet, you know exactly what material cost should transfer to finished goods. Without bills of materials, you’re guessing at product costs.

Physical inventory counts verify what your books say. Software tracks what should be in stock based on purchases, usage, and sales. Physical counts confirm what actually exists. Manufacturing businesses typically count raw materials monthly and finished goods quarterly at minimum. Discrepancies between book inventory and physical counts need investigation. Shrinkage, waste, miscounts, and theft all show up here.

Most Nampa bookkeepers see businesses struggle with this because they don’t track transfers between inventory stages. Materials get purchased and products get sold, but everything in between is a black box. The result is inaccurate cost of goods sold, unreliable profit margins, and inventory values on the balance sheet that don’t match reality.

The payoff for tracking this correctly is knowing your true product costs. You can price confidently, identify which products actually make money, and catch production inefficiencies before they eat your margins. Your inventory accounting becomes an operational tool rather than a compliance requirement. When tax time arrives, your inventory values are supportable because you can trace every dollar from purchase to sale.