Accounting for Inventory

  1. Perpetual Inventory Systems - Inventory Account (Asset)
    Detailed inventory system which records every transaction involving inventory as it occurs.

    Records continuously show the inventory that should be on hand and the cost of that inventory.

    Use of bar codes and optical scanners has led to widespread use.
  2. Periodic Inventory Systems - Purchases Account (Expense)
    Detailed records are not maintained.

    Cost of sales determined only at end of the accounting period by using records of purchases and a physical inventory count (stocktake).

    Used mostly by small businesses (cafes, corner shops).
  3. Purchase Returns and Allowances
    Purchase Return - Is recorded when the customer returns the goods (credit/cash refund).

    Purchase Allowance - The customer keeps the goods and a reduction in price is granted.
  4. Recording Sales Returns and Allowances
    • Dr Sales Returns and Allowances
    • Cr Accounts Receivable
    • (Record return of goods)

    • Dr Inventory
    • Cr Cost of Sales
    • (Record cost of goods returned)
  5. Recording Sales of Inventory
    • Dr Cash
    • Cr Sales Revenue
    • (Record cash sale)

    • Dr Cost of Sales
    • Cr Inventory
    • (Record cost of inventory)
  6. Record Sales Discount
    • Dr Cash
    • Dr Discount Allowed
    • Cr Accounts Receivable
    • (Record collection within discount period)
  7. GST and Purchasing Inventory
    • Dr Inventory
    • Dr GST Paid (Asset)
    • Cr Accounts Payable
    • (To record purchase)
  8. GST and Selling Inventory
    • Dr Cash/Accounts Receivable
    • Cr GST Collected (Liability)
    • Cr Sales
  9. Inventory Cost Flow Methods
    • Specific Identification
    • First In First Out (FIFO)
    • Last In Last Out (LIFO)
    • Average Cost
  10. Specific Identification
    Used by businesses which sell a limited variety of high unit cost items that can be clearly identified from the time of purchase to the time of sale (Cars, jewellery, antiques).

    Impractical for the majority of businesses.
  11. First In First Out (FIFO)
    Assumes first goods purchased are first goods sold.
  12. Last In First Out (LIFO)
    Assumes last goods purchased are first goods sold.
  13. Average Cost
    Assumes that goods sold are similar in nature.

    Cost of goods available for sale is calculated on the weighted average unit cost incurred.

    Average cost = (cost of goods available / total units available)
  14. In Periods of Increasing Prices
    FIFO reports the highest net income.

    LIFO the lowest.

    Average cost falls in the middle.
Card Set
Accounting for Inventory
Accounting for Inventory