MINISTRY OF FINANCE

ACADEMY OF FINANCE
----------------------------

ESSAY
SUBJECT: FINANCIAL ACCOUNTING 1

TOPIC: ACCOUNTING FOR MATERIALS

Ha Noi - 2023
 TABLE OF CONTENT

CHAPTER 1: INTRODUCTION

CHAPTER 2: OVERVIEW OF ACCOUNTING FOR MATERIALS

1. Definition:
2. Classification
2.1. Based on management needs:
2.2. Based on origin of materials
2.3. Based on different purposes of materials used
2.4. Other bases
3. Measurement:
3.1. Perpetual inventory accounting
3.2. Periodic inventory accounting
3.3. Principles of valuing materials
3.4. Initial measurement
3.5. Inventory costing methods

CHAPTER 3: ACCOUNTING FOR MATERIALS

1. Requirement of detailed
2. Source document
3. Detail accounting methods for materials
4. General accounting for materials
4.1. Perpetual accounting system applied
4.2. Periodic accounting system applied

CHAPTER 4: SUMMARY
CHAPTER 1: INTRODUCTION

In the current integration trend, domestic enterprises are facing many

difficulties due to the increasingly fierce competition in the market. In order to
survive and develop enterprises, they constantly improve their production and
business efficiency.

To achieve this, businesses have to apply many economic and technical

measures, as well as good production management, flexible use of economic levers,
and market research. Especially, closely organizing the accounting work at the unit
is meaningful in providing information to all subjects, serving the needs of
management, contributing to financial transparency, and improving the efficiency
of capital uses, saving costs for businesses. At the same time, as a basis for making
decisions to organize economic management in a timely and effective manner,
effectively manage the production and business activities of the unit. Accounting
for raw materials in a manufacturing enterprise is one of the most important aspects
of accounting. It reflects the fluctuation of raw materials from time to time and
reflects the actual value of raw materials used in order to accurately and fully
calculate the value of materials, making an important contribution to the accuracy
of product costs and the nature of profits in the business.

Besides, to constitute products, materials always play a fundamental role.

They tell us whether the product is successful or not, the quality is good or bad, the
production time is shortened or prolonged, the product cost is high or low, how to
supply and use materials to achieve as desired.

After consulting all of these reasons and taking everything into consideration,
our group decided to choose the topic “ Accounting for Materials”. Due to the
limited amount of knowledge and professional qualifications, this topic may have
some errors. Our group is really looking forward to receiving your opinion and
advice.
CHAPTER 2: OVERVIEW OF ACCOUNTING FOR MATERIALS
1. Definition:
Materials are unfinished goods consumed by a manufacturer in providing
finished goods. Materials are classified as inventory in the current assets section of
an entity’s balance sheet.
Materials accounting is the task of monitoring and recording in detail the
procurement and storage of raw materials in the enterprise. Accounting for
materials reflects the quality, quantity, and type of raw materials so that managers
can take accurate measures to control the price, quality, and quantity of materials.
2. Classification:
2.1. Based on management needs:
 Main raw materials:
Main raw material is the main object of labor in the construction and
installation enterprises is the physical foundation constituting the products’s main
entity.
The basic construction industry is also necessary to distinguish building
materials, structural objects, and construction equipment. These materials are the
main facilities forming construction units' products, construction items, but they are
different. Construction materials are products of the processing industry used in
construction enterprises to create products such as construction items and
construction works such as bricks, tiles, cement, iron, steel…
 Subordinate materials
Subordinate materials are materials used in production to increase product
quality, complete products or serve production management, product packaging ...
These materials do not constitute an entity of the product. For example: Plank,
wood, bamboo, welding rod, anti-rust paint, electric wire.
 Fuels
These are any materials providing heat energy during the production process
and facilitate the process of making usual products. Fuels can exist in liquid, solid,
and gas. For example: gasoline, oil, grease…
 Spare parts
These are any materials used for replacement or repair of machinery,
equipment, vehicle, manufacturing tools or supplies…
 Materials and equipment for capital construction
These are materials and equipment used for capital investment. The
construction equipment items for capital investment include equipment required
installation, equipment required non-installation, tools, instruments and materials
used to install in the capital investment projects.
 Other materials
Other materials are the remaining materials and the materials mentioned
above, such as packaging, packing materials…
2.2. Based on origin of materials:
- Purchases from supplies.
- Self-produced.
- Invested.
2.3. Based on different purposes of materials used:
- For production.
- For administration, selling.
- For investing in order entities.
- …
 2.4. Other bases:
3. Measurement:
3.1. Perpetual inventory accounting:
- Inventory records are updated after each purchase or sale (consumption)
based on receiving oe issuing vouchers.
- Inventory accounts (15-) are used to record the balance and the moving of
goods/ materials/ tools.
- Costs of goods sold/ used are caculated based on quantity of goods sold/ used
and unit cost assigned to those inventory.
- Cost of goods sold/ used = Quantity of good sold/ used * Unit cost of goods
(by AVCO, FIFO)
a. Definition:
- A perpetual inventory system is a method of continuously accounting for the
current state of an organization’s inventory.
- In perpetual inventory systems, computer programs and software are
typically used to record and report transactions as soon as they take place.
b. Explanation:
Before the rise of digital technology, companies perpetual inventory systems
due to the time-consuming nature of the manual work involved. Rather than asking
employees to perform constant record- keeping, firms had more productive tasks for
their workers.
Instead, prior to the widespread use of computers, the internet and other
digital technologies, it was common for a company to use a periodic inventory
system. Periodic systems involve the completion of accounting at the end of a given
period.
Recently, computing systems and other input devices, networking
technologies, and internet-based applications have taken over and made perpetual
inventory systems less burdensome for employees. Perpetual inventory systems
correctly reflect the amount of inventory on hand and the cost of goods sold. These
balances can be recorded in units or in units and dollars.
Management is, therefore, always aware of inventory levels and can make
timely purchases that ensure the desired inventory levels. Perpetual inventory
systems have been enhanced in recent years using computers and electronic point of
sale devices such as credit and readers.
However, even with such sophisticated equipment, perpetual records may be
kept only in units, with the cost of ending inventories and goods sold determined by
the periodic inventory system. For example, optical scanners are used in markets to
keep track of inventory quantities, but at the end of the accounting period, a
physical inventory is performed. This involves computing the cost of goods sold
during the period and the appropriate cost of the ending inventory.
c. Journal entries:
The journal entries used when bookkeeping in the perpetual inventory system
are different compared to the ones used in a periodic system.
 To record inventory purchases:
Inventory Debit
Accounts Payable/ Cash Credit
 To record inventory sales:
Accounts Receivable/ Cash Debit
Revenue Credit

Cost of Goods Sold Debit

Inventory Credit
 To record theft/ breakage:
Loss of Inventory Expense Debit
Inventory Credit
d. Advantages of Perpetual Inventory System:
- As merchandise stock is restricted to a certain limit the additional investment
of capital is not required.
- This is complete and dependable verifying method over the store.
- Closure of normal business activities is not required during the physical
counting of merchandise inventory.
- Preparation of financial statements is not delayed for the amount of
merchandise stock are readily available under perpetual inventory.
- Cost of goods sold or cost of production can easily be known.
- Keeping accounts under this system helps timely detection of theft and
misuse of goods and necessary steps can be taken.
- The stock of merchandise can be know anytime.
- Proper control over stored merchandise is possible.
- An experienced person is engaged in proper maintenance of accounts under
this system.
e. Disadvantages of Perpetual Inventory System:
- Keeping accounts of stock under the perpetual system in the organization
dealing with the varieties of goods is expensive and time-consuming.
- But nowadays using computer and electronics scanners almost all business
organizations follow this method.
3.2. Periodic inventory accounting:
- Inventory records are update periodically based on physical inventory counts.
- Inventory account (15-) are only used to reflect the balance of goods, the
moving of goods during the periodic is recorded in purchase account (612).
 - Cost of good sold/ used are calculated by talking cost of goods available for
sale/ use less cost ending inventory.
- COGS/U = (Opening balance of goods + Cost of received goods during the
period) - Closing balance of goods
- Cost of ending inventory is determined by taking the units of ending
inventory (found by physical count) and unit cost assigned to those units
( AVCO, FIFO).
a. Definition:
- A periodic inventory accounting does not keep continuous track of ending
inventories and the cost of goods sold. Instead, these items are determined at
the end of each quarter, year, or accounting period.
- Although this method offers ease of use for record-keeping, it hinders the
managerial decision-making process.
- However, the sheer volume of transactions in some merchandising businesses
makes it impossible to use anything but the periodic accounting.
b. Journal entries:
 When goods are purchased from supplier:
Purchase Debit
Account Payable Credit
 When expenses are incurred to obtain goods for sale-freight-in, insurance:
Freight-in Debit
Insurance Debit
Cash/ Bank Credit
 When payment is made to supplier:
Account Payable Debit
Purchases returns and allowances Credit
 When goods are sold to customers:
Account Receivable Debit
Sales Credit
 When goods are returned by customers:
Sales returns and allowances Debit
Account Receivable Credit
 When cash is collected from customers:
Cash Debit
Account Receivable Credit
 At the end of the periodic:
Inventory (Ending inventory) Debit
COGS (Balancing figure) Debit
Purchases Credit
Inventory (Beginning inventory) Credit
c. Advantages of Periodic Inventory System:
- In contrast, a perpetual inventory accounting provides managers with real-
time information about inventory levels, allowing them to make informed
decisions. You can count inventory more frequently, which reduces the risk
of damage or shrink of merchandise.
- The periodic accounting is useful for retail businesses that deal in low-value
inventory, and it can save businesses a lot od time and effort. When
implemented correctly, the system counts beginning inventory and ending
inventory.
- Moreover, the periodic system does not require real-time records of
purchases and customer sales. It eliminates the need for a continuous
inventory record. Instead, you keep separate accounts for beginning and
ending inventory, as well as for on-hand inventory.
 - Periodic inventory is easy to implement. Instead of entering a new price for
the goods you have in stock, you simply make a purchase and deduct it from
the cost of goods sold.
d. Disadvantages of Periodic Inventory System:
- The disadvantages of this system make it difficult to track inventory costs or
make present-day business decisions.
- You should keep in mind that the physical inventory count may differ from
the inventory count in the software.
3.3. Principles of valuing materials:
- Cost: Materials are determined at cost.
- Consistency: Inventory costing methods should be applied consistently.
- Prudence: Where the net realizable value is lower than cost, inventories are
measured at the net realizable value.
- Materiality: Only direct costs are included into the cost of inventories.
3.4. Initial measurement:
Materials are initially measured at cost “The cost of inventories should
comprise all costs of purchase, costs of conversion and other costs incurred in
bringing inventories to their present location and condition”.
Materials are initially measured at cost:
o The cost of purchase of materials comprise the purchase price, non -
reimbursable taxes and duties, and transportation, handling and other
costs directly attributable to the purchase.
o Trade discounts and purchase returns and allowances are deducted
from the costs of purchase.
3.5. Inventory costing methods:
Each firm, depending on its features of production and business that applies
the method of calculating the inventory’s value, can choose the methods of price
calculation so that it is convenient in the calculation process but still must use
consistency principle in accounting.
Due to The Circular No.200/2014/TT-BTC of The Ministry of Finance on
22/12/2014 , there are three different available methods that can be used when
determining inventory cost:
- Weighted average cost (WAC)
- First-in, first-out (FIFO)
- Specific identification
First of all, it is Weighted average cost (WAC). This is one of the most
popular costing methods. The WAC method uses the item’s average cost per unit
throughout the year which is calculated by dividing the total cost by the total
number of units purchased during the year.
Cost of goods sold/ used = Units of goods sold/ used * Weighted-average unit cost
WAC helps firms have the chance of income manipulation minimized
compared to other methods. There is also a cost saving associated with this method
due to the requirement of a small amount of time to maintain. On the other hand,
this method would cause mispricing. This method is suitable for businesses dealing
with a large volume of similar items.
Secondly, the FIFO method is the method that assumes the first purchased
are the first sold. Under this method, the costs of the earliest goods purchased are
the first to be recognized as the cost of goods sold.
For instance, a company purchased goods during a six-month time period.
Sales in the month of June are 80 units.
Month Units of purchases Purchased price ($)
January 100 50
February 150 75
March 80 100
April 90 120
 May 85 90
June 75 70

Cost of goods sold = 80*50 = $4.000

Inventory = 20*50 + 150*75 + 80*100 + 90*120 + 85*90 + 75*70 = $43.950
The FIFO method matches the natural flow of inventory and is also simple to
understand. Besides, it could have some cons such as the revenue and the costs in
the method do not match which causes the enterprise’s overstated profits.
The last method is a specific costing method used to cost inventory at
specific cost of a particular unit. It can only be used by the businesses that have
unique items in inventory such as used cars, custom houses…because this method
is vitally expensive to use for inventory items that have common characteristics.
CHAPTER 3: ACCOUNTING FOR MATERIALS
1. Requirement of detailed:
- Check the purchase, sale and use of materials.
- Record the actual quantity, specification and value of raw materials.
- Provide inventory information to serve management.
- Open accounting books according to the provisions of law.
2. Source documents:
 Accounting documents:
Accounting documents used are prescribed according to accounting
documents issued by the Ministry of Finance and other relevant decisions,
including:
o Inventory receiving report (Form 01-VT): Materials received are
inspected by the Receiving Department. Once inspected, a receiving
report is prepared showing the quantity received and its condition.
o Inventory issuing report (Form 02-VT)
 o Inventory inspection report (Form 03-VT)
o Inventory report (Form 04-VT)
o Inventory stock-take report (Form 05-VT)
o Inventory purchasing list (Form 06-VT)
o Allocation table (Form 07-VT)
o Commercial invoice: The receiving report and the invoice are used to
record the receipt of the merchandise and to control the payment.
 Accounting books:
Depending on detailed of accounting method applied in the enterprise, the
following detailed accounting books are used:
o Book warehouse
o Book of detailed material accounting
o The rotation comparison book
o Balance book
3. Detail accounting methods for materials:
 Parallel processing warehouse card:
- In warehouse: The storekeeper uses “warehouse cards” to reflect the position
of input – output material inventory. Each document related to raw material
is written down on the stock cards. At the end of the period, the storekeeper
has to calculate the input - output material inventory and the ending
inventory based on the warehouse card.
- In the accounting department: accountant records all transactions regarding
inventory in an inventory book. Unlike stock cards, the inventory book can
reflect each unit cost of the raw material list. At the end of the period, the
accountant compares the data on the inventory book with the stock card
which is transferred from the storekeeper to record in the Summary of input-
output material inventory.
- Advantages:
o Able to inspect and figure out the error from recording with no effort.
o Can manage strictly the changes and amount of each material.
- Disadvantages:
o This method is not simple to avoid duplicate.
o Limit the timeliness of accounting.
o Only used when the business has few raw materials.
 Rotation comparison method:
- In warehouse: This method is applied similarly to parallel processing.
- In the accounting department: Accountant writes down a materials rotation
comparison book instead of an accounting detail book to calculate the
quantity and value of each material according to each warehouse. This book
records data based on input - output material inventory documents incurred in
the period. At the end of the period, the accountant compares the total
amount of input and output of each stock card to the materials rotation
comparison book after receiving the stock card. Finally, the accountant
compares the materials rotation comparison book to the general accounting
of materials.
- Advantages:
o This method mitigates recorded of the accountant during the period.
o Can be used for many raw materials.
- Disadvantages:
o Meet difficulties in the checking.
 Balance bookkeeping method:
- In warehouse: In addition to stock cards, a balance book is used to record
each material inventory on hand. At the end of the period, the balance book is
 transferred to the storekeeper to note the material inventory on hand
according to the stock card.
- In the accounting department: The accountant receives the input - output
inventory documents periodically and summarizes data according to the
criteria of input - output materials value. Then, the accountant has to record
in the input - output cumulative list and record in the summary table at the
end of the period. Besides that, the accountant calculates the total amount of
material inventory on hand to write down on the balance book.
- Advantages:
o Mitigate the record of the accountant.
o Can be used when a company owns many raw materials.
- Disadvantages:
o The activity of comparing the balance book with the summary table
could be complicated due to the difference incurred.
4. General accounting for materials:
4.1. Perpetual accounting system applied:
4.1.1. Accounts used:
 Account 151: Goods in transit
This account is used to record the value of goods, materials (raw materials,
materials, tools, goods) purchased under ownership of the enterprise which are
on the way of delivery or have arrived at the enterprise but they are pending
storing.
- Debit side: Value of goods owned by the entity in transit at the end of the
period.
- Credit side: Value of goods in transit which is received by the entity.
 Account 152: Materials
 This account is used to monitor the existing value, fluctuations of materials
according to actual prices.
- Debit side:
o Value of purchasing raw materials imported during the period.
o Cost of purchasing raw materials.
o Value of unsend materials that reimported at the end of the accounting
period.
o Value of excess materials in buying and inventory.
- Credit side:
o Actual value of exported materials in the period.
o Discount on purchases, trade discount.
o Value of missing and damaged materials in warehouse.
 Other related accounts:
- Account 153: Tools and supplies.
- Account 133: Deductible VAT.
- Account 331: Payable to suppliers.
- Account 111, 112: Cash on hand, cash in bank.
- Account 621, 627, 641, 642: Expenses.
- Account 242: Prepaid expenses.
- …
4.1.2. Common transactions:
a. Increase in materials:
o The 1st case: Received inventory and invoice at the same time
- If input VAT is deductible, the following entries:
Dr acc 152: Purchase price of materials (excluded VAT)
Dr acc 133: VAT is deducted
Cr acc 111, 112, 141: Total payment price (if purchase immediately)
 Cr acc 331: Total payment price (if purchase on credit)
- If the input VAT is not deductible, cost of inventory includes VAT
Dr acc 152: Purchase price of materials
Cr acc 111, 112, 141: Total payment price (if purchase immediately)
Cr acc 331: Total payment price (if purchase on credit)
o The 2nd case: Inventory received but the invoice is not received yet.
- Accountant has the the receiving report only: Put the report into the “Goods
without invoices” file and make no record.
- If the invoice has been received within the month: Record as the 1st case.
- At the end of the month, if the invoice has not been received then record the
estimated value of materials:
Dr acc 152: Estimated value of materials
Cr acc 331: Payable to supplier
- Next month, if the invoice has been received  Making the adjustment based
on the Invoice price.
 If the price on the invoice is greater than the estimated price:
Dr acc 152: Price on the invoice - estimated price
Dr acc 133
Cr acc 331
 If the price on the invoice is less thanthe estimated price,
accountants adjust by reserving entry:
Dr acc 331
Cr acc 152: Estimated price – price on invoice
Cr acc 133
o The 3rd case: Inventory in transit
- The invoice has been received but inventory has not received: Make no
entry. Put the invoice into the “Goods in transit” file.
- Within a month, if the inventory has been received  recorded as the 1st
case.
- At the end of the month, if the inventory has not been received, recorded as
“Goods in transit”
Dr acc 151: Purchase price (excluded VAT)
Dr acc 133: VAT deducted
Cr acc 111, 112, 141, 331: Total payment
- Next month, if the inventory has been received, recorded as the decrease in
“Goods in transit” account.
Dr acc 152, 621, 627, 641, 642
Cr acc 151
o The 4th case: Discount incurred
- Trade discount (quantity, purchase): allowed by the seller to the buyer on the
large quantity of goods as announced, excluded from cost of inventory.
- Payment discount (settlement, cash): allowed if the customer pays before the
due date, recorded as financial income.
Dr acc 111, 112, 331: Total discount
Cr acc 152: Trade discount
Cr acc 515: Payment discount
Cr acc 133: VAT
o The 5th case: Stock taking (physical inventory counts)
- If surplus incurred:
 The reason of measuring equipment.
 The reason of suppliers’ mistake.
 On investigation.
(1) Receiving all to warehouse:
Dr acc 152
 Cr acc 331
 Surplus:
Dr acc 133
Cr acc 3381
(2) Purchase for surplus’ differences:
Dr acc 3381
Dr acc 133
Cr acc 331
(3) Return to suppliers:
Dr acc 3381
Cr acc 152
 Shortage:
 Lower than deficiency quotas:
Dr acc 642
Cr acc 1381
 Higher than degiciency quotas:
Dr acc 111: The amount of material compensation collected
Dr acc 1388: The amount of material compensation receivables
Cr acc 1381
 If higher than deficiency quotas, reasons can be identified
immediately, no need to record on account 1381.
o Other ways:
- Production:
Dr acc 152: Materials increase
Cr acc 154: Self-production has been completed
- Investment:
Dr acc 152: Materials increase
 Cr acc 411: Receive joint venture capital contribution
- Gifts, donation…
Dr acc 152: Materials increase
Cr acc 711: Donated
b. Decrease in materials:
- Issuing material for production and business, based on actual price:
Dr acc 621: Materials are directly used for production
Dr acc 627: Materials are issued for administration in the production
department
Dr acc 641: Materials are used for selling purpose
Dr acc 642: Materials are used for general administration
Dr acc 241: Materials are used construction in progress
Cr acc 152
- Issuing material for outsourcing agreement:
Dr acc 154
Cr acc 152
- Issuing material for sales:
Dr acc 632
Cr acc 152
- Issuing material for investment:
Dr acc 222
Dr acc 811 (if the revaluation price < book value)
Cr acc 152
Cr acc 711 (if the revaluation price > book value)
- Other:
Dr related account
Cr acc 152
4.2. Periodic accounting system applied:
 4.2.1. Account used:
Periodic accounting system makes use of several accounts which are similar
to the perpetual accounting system such as:
- Account 151: Goods in transit
Account 152: Materials
Account 153: Tools and supplies
o Debit side: Reflects the value of goods in transit, materials, tools and
supplies…at the end of the period transferred from account 611.
o Credit side: Represents the practice of transferring the beginning
balance to account 611.
- Account 611: Purchase
Account 6111: Materials and tools purchase
Account 6112: Goods purchase
o Debit side:
 Receiving the beginning balance which is related to account
151, 152, 153.
 Represents the cost of materials and tools incurred during the
period.
o Credit side:
 Transferring materials, tools inventory and goods transit at the
end of the period to account 151, 152, 153.
 Reflects the cost of materials and tools used for different
purposes through the period.
- Other accounts used: Cash accounts (111, 112, 113…), expense accounts
(621, 627…), input VAT (133) and output VAT (333) (if any)…
4.2.2. Common transactions:
- At the beginning balance of the period: transfer account 151, 152, 153 to the
account 611.
Dr acc 611: Transferred value
Cr acc 151, 152, 153: Value of materials, tools and goods in transit
- Throughout the period:
o Reflect the cost of materials and tools according to the invoices
(receiving materials and tools)
Dr acc 611: Transferred value
Dr acc 133 (if any): deducted VAT
Cr acc 111, 112, 331…: Total payment
o Incurred import tax (if any)
Dr acc 611
Cr acc 333
o Incurred discounts (if any)
Dr acc 111, 112, 331: Discounted value
Dr acc 133 (if any)
Cr acc 611
o If materials and tools are received as capital investment
Dr acc 611
Dr acc 133 (if any)
Cr acc 411
- At the end of the period:
o Transfer materials, tools inventory and goods in transit at the and of
the period to account 151, 152, 153
Dr acc 151, 152, 153
Cr acc 611
o Issue materials and tools for production
Dr acc 621, 627…
Cr acc 611
o If materials and tools are issued for investment
Dr acc 211
Cr acc 611
CHAPTER 4: SUMMARY
In conclusion, accounting for material is a crucial aspect of financial
management for any organization involved in production activities. Material
refers to any physical substance used in the production process, such as raw
materials, components, and finished goods. Accounting for material involves
tracking all material transactions, from acquisition to consumption and
disposal, to ensure accurate cost allocation and inventory management. This
process helps organizations to maintain effective control over their material
resources, minimize waste and loss, and ultimately improve their financial
performance. Effective material accounting requires a systematic approach,
including accurate record-keeping, reconciliation, and periodic physical
verification of inventory. Organizations with sound material accounting
practices are better positioned to make informed decisions, respond to market
changes, and sustain long-term success.