What is Inventory?

Inventory is the total of raw materials, work in process (WIP), and finished goods that a business holds for the purpose of resale. The important point to remember here is that the goods are intended for resale.

Raw materials is inventory waiting to be used in the manufacturing process, work in process are partially manufactured goods, and finished goods are inventory held for resale.

Beginning inventory is the goods unsold at the start of the accounting period, and ending inventory is the goods unsold at the end of the accounting period.

Inventory is recorded in the balance sheet of the business at cost, or if lower market value, under the heading Current Assets, that means it is expected to be convertible into cash within a year.

The word stock is often used instead of inventory and in relation to goods held by a business, mean the same thing.

How do you record Inventory?

The recording of inventory is split into three accounts

  1. The Sales account which records the reductions in inventory at selling prices and is transferred to the profit and loss at the period end.
  2. The Purchases account which records the additions to inventory at cost and is transferred to the profit and loss account at the period end.
  3. The Inventory Account in the balance sheet which maintains the opening and closing inventory balances.

The reason for the three accounts is that purchases (increases) are at cost, and sales (decreases) are at selling price (i.e. they include a profit).

If both sales and purchases were recorded on one account the balance would be a meaningless figure including the profit element, and would not represent the inventory balance.

What is Inventory? August 8th, 2017Team

You May Also Like

Related pages

unrealized loss journal entrysupplier invoice processinglifo equationsteps to accounting cycleexamples of profitability ratiospayback formulaformula for retained earningsaccrual accounting entryinventory on consignment accountinghow do you find ending inventoryledger entries examplesmarkup cost calculatoraccounts receivable normal balancesales ledger exampleconsignment sales accounting treatmenthow to calculate periodic interest ratetotal manufacturing overhead variancetotal monthly fixed manufacturing costthree column ledgercapital turnover ratio calculationprepaid expense journal entryannual depreciation calculatorwhat are the steps in the accounting cyclecalculate average accounts receivablequick ratio accounting formulaaccounting accounts receivable journal entriesliquidation accounting treatmentfuture value interest factor of an annuitytotal asset turnover formulacalculation of markupunearned revenue a liabilitycalculation for inventory turnsnet30 termspmt finance formuladiscounted present value excelunearned revenue definitionconvertible bond accounting treatmentinventory chart templatemarketable securities balance sheetformula for future value of annuityhow to find variable cost formulaformula for cost of good soldinternal controls for accounts receivableusing fv function in excelcash voucher sample formatdouble entry bookkeeping practice questionschart of accounts templatesin which journal are adjusting entries recordedcalculate ratios in excelformula for bepwhen is the balance in a prepaid expense account reducedhow to work out markup percentagegp markup calculatordistinguish between capital receipt and revenue receiptthe rule of 78 calculatorchart of accounts examples manufacturingcost method journal entrieschange in nwc formulahow to calculate pbithow to calculate dividends payabledebtors collection period ratiodouble entry accounting tutorialmargin and markup formulasmanufacturing accounting basicsexcel accounts spreadsheetperpetual bond calculatorstock valuation spreadsheetdefinition bookkeepingunit variable cost formulaprofit margin calculator downloadexcel checking account templatecash conversion period