What happens in Xero when you approve an invoice for a tracked inventory item?

When you approve an invoice for a tracked inventory item in Xero, the correct outcome is that the inventory asset account increases. Approving an invoice indicates that a sale has occurred, and the inventory that was previously held as an asset will now be reduced because it is considered sold.

In Xero, tracked inventory items are accounted for in a way that reflects their movement. When an invoice is approved, the inventory levels are adjusted accordingly, resulting in a decrease of the value recorded in the inventory asset account. This reflects the fact that items are no longer on hand because they have been sold to a customer.

This transaction aligns with generally accepted accounting principles, where inventory accounted as an asset would decrease at the point of sale, while simultaneously recording a corresponding increase in either cash or accounts receivable and recognition of revenue.

Understanding this concept of inventory tracking and its impact on financial statements is essential for accurately assessing inventory management and ensuring that financial reports properly reflect the status of inventory as it is sold.