Accounting for Inventory

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.

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).

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.

• Dr Sales Returns and Allowances
• Cr Accounts Receivable
• (Record return of goods)

• Dr Inventory
• Cr Cost of Sales
• (Record cost of goods returned)

• Dr Cash
• Cr Sales Revenue
• (Record cash sale)

• Dr Cost of Sales
• Cr Inventory
• (Record cost of inventory)

• Dr Cash
• Dr Discount Allowed
• Cr Accounts Receivable
• (Record collection within discount period)

• Dr Inventory
• Dr GST Paid (Asset)
• Cr Accounts Payable
• (To record purchase)

• Dr Cash/Accounts Receivable
• Cr GST Collected (Liability)
• Cr Sales

• Specific Identification
• First In First Out (FIFO)
• Last In Last Out (LIFO)
• Average Cost

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.

Assumes first goods purchased are first goods sold.

Assumes last goods purchased are first goods sold.

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)

FIFO reports the highest net income.

LIFO the lowest.

Average cost falls in the middle.