Accounting for inventories Accounts in English Accounting for inventories

Accounting for inventories Inventory Classification. Inventory systems.

Inventory Classification Inventories are asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. The description and measurement of inventory require careful attention because the investment in inventories frequently the largest current asset of merchandising (retail) and manufacturing businesses.

Inventory systems Perpetual System. Periodic System.

Perpetual System Under a perpetual inventory system, a continuous record of changes in inventory is maintained in the Inventory account. That is, all purchases and sales (issues) of go are recorded directly in the Inventory account as they occur. The accounting features of a perpetual inventory system are as follows:- purchases of merchandise for resale or raw materials for production are debited to Inventory rather than to Purchases. Freight-in, purchase returns and allowances, and purchase discounts are recorded in Inventory rather than in separate accounts. Cost of goods sold is recognized for each sale by debiting the account, Cost of Goods Sold, and crediting Inventory. Inventory is a control account that is supported by a subsidiary ledger of individual inventory records. The subsidiary records show the quantity and cost of each type of inventory on hand.

Periodic System Under a periodic inventory system, the quantity of inventory on hand is determined only periodically, as its name implies. All acquisitions of inventory during the accounting period are recorded by debits to a Purchases account. The total in the Purchases account at the end of the accounting period is added to the cost of the inventory on hand at the beginning of the period, to determine the total cost of the goods available for sale during the period. To compute the cost of goods sold, ending inventory is subtracted from the cost of goods available for sale. Note that under a periodic inventory system, the cost of goods sold is a residual amount that is dependent upon a physically counted ending inventory.