Chapter 6
INVENTORY
Types of Inventories
◦ Consumed in the production process
e.g.: raw materials and supplies used in the production of
goods
◦ Consumed in the course of agency operations or
implementation of its activities
e.g.: office supplies, accountable forms, drugs and
medicines for health centers, food supplies
◦ Distributed at no charge or for a nominal charge in the
pursuit of any undertaking, programs and projects
e.g.: school supplies, textbooks etc.
◦ Held for sale in the ordinary course of operations
e.g.: merchandise purchased by an LGU and held for resale
such as accountable forms for sale, drugs and medicines for
sale, land and other property held for sale, agricultural
produce, etc..
Classification of Inventories
a) Inventory Held for Sale
b) Inventory Held for Distribution
c) Inventory Held for Manufacturing
d) Inventory Held for Consumption
Measurement
◦ Initial recognition at cost (including costs of purchase,
costs of conversion (materials, labor and overhead) and other
costs incurred in bringing the inventories to their present
location and condition.
◦ Inventories acquired through a non-exchange transaction shall
be measured at their fair value as at the date of acquisition.
Fair Value is the amount for which the same inventory could
be exchanged between knowledgeable and willing buyers and
sellers in the marketplace
Measurement
o Inventories comprising agricultural produce that an entity has
harvested from its biological assets shall be measured on initial
recognition at their fair value less costs to sell at the point of
harvest.
o Subsequent measurement during the year, the weighted average
cost method
o the cost of each item is determined from the weighted average
of the cost of similar items at the beginning of the period, and
the cost of similar items purchased or produced during the
period.
Measurement
◦ At the end of the reporting period
Inventory held for sale will be measure at lower of cost
and net realizable value.
Net realizable value selling price less estimated cost in the
ordinary course of operation.
Inventories for consumption and distribution
At the lower of cost and current replacement cost.
Current Replacement Cost is the cost the entity would
incur to acquire the asset on the reporting date.
System/Method
◦ Under the system, an agency continually updates its inventory
records to account for additions to and subtractions from
inventory. The local accountant shall maintain the Supplies Ledger
Card (SLC) for each inventory item as the perpetual inventory
record.
The SLC is a form used in the Accounting Division/Unit for each type
of supplies to record all receipts and issues made. It shall be
maintained by fund cluster.
Requisition Procedures
Written requisitions shall be prepared by the requisitioning
departments/office. The following forms shall be used:
◦ Requisition and Issue Slip (RIS) – for supplies and materials carried in
stock
◦ The RIS shall be used by the Requisitioning Division/Office to request supplies/goods/
equipment/property carried in stock and by the Supply and/or Property Division/Unit to
issue the item/s requested.
◦ Purchase Request (PR) – for supplies and materials not carried in stock
and those that will be procured out of the Petty Cash Fund. The GSO
shall certify that the items to be procured are not available on stock in
the purchase request.
◦ Issuance Form for In-Kind Donations – for supplies and materials
acquired through non-exchange transactions.
Form non existence
Approval of Requisition
◦ head of office or department concerned who has administrative control of
the appropriation against which the proposed expenditure is chargeable is
deemed sufficient.
◦ in case of requisition for supplies to be carried in stock which shall be
approved by the Local Chief Executive.
Receipt of Inventories
◦ shall be documented with an Acceptance and Inspection Report (AIR).
◦ The procuring officer shall record in the stock card the inventories received based on
the AIR and submit to the local accountant copies of the AIR, Purchase Order and
delivery receipts.
◦ In case of Inventories acquired thru non-exchange transactions, an Acknowledgment
Receipt of In Kind Donations shall be prepared and shall be the basis in recognizing
the Inventories in the stock cards. It shall indicate the purpose of the inventories, if
provided.
AIR is a report submitted by the Inspection Officer/Committee and the
Supply and/or Property Custodian on the inspection and acceptance,
respectively, of the purchased supplies/goods/equipment/property.
PO is a form/document used by the agency/entity, addressed to a
supplier,. to deliver specific quantities of supplies/goods/property
subject to the terms and conditions contained in the PO.
Recording receipts of inventory
◦ Upon receipt of the AIR and other supporting documents such as Purchase Orders,
Delivery Receipts and/or Supplier’s Invoice, the local accountant shall draw a Journal
voucher (JV) to record the Inventories in the Journal of Procurements Received and in
the inventory ledger cards.
◦ In case of the inventories acquired thru non-change transactions, the Report on
Receipt of In-Kind Donations for Inventories shall be the basis for drawing the JV for
the recognition of the Inventories in the books of accounts.
The cost shall be based on the fair value of the goods received.
Issuances Of Inventory
◦ It shall be supported with Requisition and Issue Slip (RIS) which the general services
officer (PGSO) shall summarize monthly in the Report of Supplies and Materials Issued
(RSMI).
o The RSMI together with the supporting RIS shall be submitted to the local accountant
within five days after the end of the month, and the RSMI shall be the basis in drawing a JV
to record the issuances.
Recognition as an Expense.
◦ upon consumption or distribution, in the period in which the related revenue is
recognized.
◦ goods are distributed or related service is rendered
◦ all losses of inventories shall be recognized as an expense in the period the
write-down or loss occurs
◦ The JV drawn based on the RSMI recognized the expense and the issuance of
the Inventories.
◦ The Inventories transferred from the Procuring Unit to the distribution site shall
be considered issuance, but, at the end of the year, a count shall be conducted
to determine the undistributed/unconsumed items and the cost of these items
shall be restored back to the inventory account.
Write-down of Inventories
◦ is the reduction in the cost of Inventories to its net realizable value, in case of
Inventories held for sale, or the replacement cost in case of Inventories held for
consumption or distribution.
◦ Inventories are written down on an item by item basis.
◦ The amount of any write-down of inventories shall be recognized as an
expense in the period the write-down occurs.
Example of Accounting Entries
A. Inventory Held for Consumption
B. Inventory Held for Sale
C. Inventory Held for Distribution
Disclosure
a. The accounting policies adopted in measuring inventories, the cost
formula used and method of recording;
b. The total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
c. The amount of inventories recognized as an expense during the
period;
d. The amount of any write-down of inventories recognized as an
expense in the period;
e. The amount of any reversal of any write-down that is recognized in
the statement of financial performance in the period;
f. The circumstances or events that led to the reversal of a write-down
of inventories;
g. And the carrying amount of inventories pledged as security for
liabilities.
Inventory of Supplies and Materials.
The local chief executive shall require periodic physical inventory of
supplies and materials. Physical count of unissued inventory items
by type shall be conducted at least once a year and reported in the
Report of the Physical Count of Inventories (RPCI). The report shall
be submitted to the Auditor not later than January 31 of each year.
Disposal of Supplies and Materials.
◦ Disposal procedures shall be in accordance with applicable rules
and regulations on supply and property management in local
government units. The Waste Materials Report (WMR) shall be
used in the disposal of supplies and materials.
◦ The WMR shall be used to report all waste materials such as
destroyed spare parts and other materials considered scrap due to
replacement.
Inventory Accounting System.
◦ consists of receipt and acceptance of the inventory items,
recording the books of accounts, issuance, controlling and
monitoring of inventory items.
Inventory Accounting Sub-Systems
◦ Receipt, Inspection, Acceptance and Recording Deliveries of
Inventory Items
Journal of Procurements Received
◦ is a special journal for procurements received based on the JVs
drawn to recognize the supplies and materials received.
Stock Card (SC).
◦ shall be used to record all receipts and issuances of supplies. It
shall be maintained by the Supply and Property Unit for each item
in stock.
Summary
