Bookkeeping method
To use the weighted average cost method, you first need to calculate the average cost of all the fuel in your inventory. This is done by dividing the total cost of the inventory by the number of units in inventory.
When you sell fuel, you then subtract the number of units sold from the inventory and update the average cost. The cost of the fuel sold is then calculated by multiplying the number of units sold by the average cost.
For example, let’s say you have 100 liters of fuel in your inventory and the total cost of the inventory is Rs. 10,000. The average cost of the fuel is then Rs. 100 per liter (10,000 / 100).
If you then sell 50 liters of fuel, you would subtract 50 from the inventory and update the average cost to Rs. 120 per liter (10,000 / 50). The cost of the fuel sold would then be Rs. 6,000 (50 * 120).
The weighted average cost method is a good option for fuel dealers who have a relatively small inventory and who do not need to track the cost of the fuel sold to the exact liter.
Here are some other bookkeeping methods that can be used to track fuel inventory:
1. First-in, first-out (FIFO):
This method assumes that the first units of fuel that are bought are the first units that are sold. This means that the cost of the fuel sold is based on the cost of the oldest units in inventory.
2. Last-in, first-out (LIFO):
This method assumes that the last units of fuel that are bought are the first units that are sold. This means that the cost of the fuel sold is based on the cost of the newest units in inventory.
3. Specific identification method:
This method tracks the cost of each individual unit of fuel in inventory. This is the most accurate method, but it is also the most time-consuming.
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