 treating inventory as non-incidental material or supplies so if you account for inventories as materials and supplies that are not incidental you deduct the amounts paid or incurred to acquire or produce the inventoriable items treated as non-incidental materials and supplies in the year in which they are first used or consumed in your operations inventory treated as non-incidental materials and supplies is used or consumed in your business in the year you provide the inventory to your customers so financial accounting treatment of inventories your financial accounting treatment of inventories is determined with regard to the method of accounting you use in your applicable financial statement so you know again the general idea is that they want you to kind of follow what you're doing on the books side side of things now obviously if you're a small business and you're reporting on a schedule c it's not like you're a publicly publicly traded company that's creating financial statements that are required for external reporting to investors so the only so you might not be reporting obviously external financial statements of your small business on the schedule c unless you need something like a loan or financing or something like that but the general idea is that your you know the system you're using for the bookkeeping that would be used to create your financial statements would generally be kind of the system that you would use for for your your taxes in terms of an accrual method cash method or a combo so for financial accounting treatment of inventories is determined with regard to the method of accounting you use in your applicable financial statement as to find in section four five one b three or if you do not have an applicable financial statement with regard to the method of accounting you use in your books and records that have been prepared in accordance with your accounting procedures so changing your method of accounting for inventory so what about if i if i need to change it and possibly that may happen if you're on a cash based method and you're saying i think it might be more appropriate for me to be on a cruel based method given the fact that i have inventory and possibly that that inventory has increased or something like that so if you want to change your method of accounting for inventory you must file form three one one five application for change in accounting method so you got to ask the irs for permission so see changing accounting method later now you would think that if you had a rational reason for it meaning inventory has gone up and i was on a cash based method and i think the inventory has gone up to the point where it would be more appropriate for me to use an accrual method at least with regards to the inventory sales and whatnot then you would think they would accept that kind of of rationale if you just were like whatever willy nilly i just want to change it because i want to change it kind of thing then they might argue you would think for consistency so uh so items include an inventory so if you are required to account for inventories include the following items when accounting for your inventory so you got the merchandiser stock and trade obviously if you just buy stuff mark it up and sell stuff the stuff you're buying and planning to sell is inventory and then we got the raw materials so if you're gonna the other kind of inventory situation we have is one in which we're gonna be making things either using a job cost system or a process cost system oftentimes where we're gonna buy raw materials we're gonna start to work on them work in process and then we'll have the finished goods that are putting the raw materials together with our overhead in our our labor work in process that's the middle step of that manufacturing process when the finished goods aren't done they're still kind of raw they're not raw anymore but they're they're not finished either and then you got the finished products when we converted the raw materials into that finished goods ready to sell supplies that physically become a part of the item intended for sale