INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING

ACC106

CHAPTER 3 (cont’d) – ACCOUNTING FOR INVENTORY

Accounting for stock/inventory
Define Inventory

• Held for sale in the ordinary course

of business in the process of
Stock or production for such sale
inventories • To be consumed in the production of
goods or services for sale
are • Inventories are current assets as
tangible they can be used or converted into
assets: cash within one year or within the
next accounting cycle of the
business.
Accounting for stock/inventory
The purpose of accounting for inventory

ü To determine the cost of sales and;

ü to determine the value of unsold
inventory or closing inventory at the
end of the accounting period.
 Movement of stock/inventory
1. Increase in Stock Effect of Accounts
transaction

In the book of a Purchase- goods Purchase Purchases

buyer bought by the Expense A/c
business for the increase
purpose of resale
In the book of a Sales Return (Return Sales Return
seller Inward) – goods revenue inward A/c
return by buyer decrease
 Movement of stock/inventory
2. Decrease in Stock Effect of Accounts
transaction

In the book of a seller Sales – sale of goods with Sales Sales A/c
prime intention of resale revenue
increase

In the book of a buyer Purchase Return (Return Purchase Return

outward) – goods return to Expense outward
supplier decrease A/c
 Purchase & Sales of Goods

Purchase and sales of goods can be divided into 2 categories:

Transactions Accounts Involved

a. Cash Purchase Cash Account & Purchase Account

b. Credit Purchase Creditors Account & Purchases Account

c. Cash Sales Cash Account & Sales Account

d. Credit Sales Debtors Account & Sales Account

Purchase & Sales of Goods
Purchases • Goods purchased previously may be
returned by the buyer/customer
Return • Credit Note will be sent to the buyer

• Businesses returned the goods to the

Sales supplier.
Return • Debit Note will be sent to the
supplier.

Notes: Debit note and credit note are used while the return of goods is
made between two businesses. Debit note is issued by the purchaser, at
the time of returning the goods to the vendor/supplier and the
vendor/supplier issues a credit note to inform that he/she received the
returned goods.
 Example: Purchase & Sales Return
On 10th of June, the business
• Effect: (Creditor) Zira increase, purchases
purchased goods on credit
from Zira amount RM3,000. expense increase

On 11th of June, the owner

• Effect: Purchase expense decrease and
took goods worth RM100 for
his own use drawings increase

On 12th of June, the business

• Effect: Sales revenue increase, debtor
sold goods on credit to Lisa
amount RM 1,000 increase

On 13th of June, the business

• Effect: Purchase return increase, creditors
returns goods to Zira
Enterprise amount RM200 decrease

On 14th of June, Goods return

by Lisa amount RM100
• Effect: Sales return increase, debtor decrease.
Date (A) + (E) = (OE) + (R) + (L)
Assets Expenses Owner’s Equity Revenue Liabilities

June Purchases Creditor

10 +3,000 +3,000

June Purchases Drawings

11 - 100 +100**

June Debtor Sales

12 + 1,000 +1, 000

Date (A) + (E) = (OE) + (R) + (L)

Assets Expenses Owner’s Equity Revenue Liabilities

June Purchases Creditor

13 return -200
+ 200
June Debtor Sales return
14 -100 +100

** drawings increase will reduce OE