Accounting for

INVENTORY
 What is inventory?
• Inventory is a very significant current asset for retailers, distributors,
and manufacturers.
• Inventory serves as a buffer between
1) a company's sales of goods, and
2) its purchases or production of goods.
Companies strive to find the proper amount of inventory so that it can
meet:
- fluctuating demand of its customers,
- avoid disruptions in production, and
- minimize holding costs.
Inventory – Manufacturing
• The direct material (also known as raw materials) inventory reflects
all the materials the company uses to make a product.
• Work-in-process inventory - At any point in the manufacturing
process, the company probably has items that are in the process of
being made but aren’t yet complete.
• Finished goods inventory - goods that are completely ready for sale
to customers, but haven’t yet been sold,
 Merchandise inventory
• is goods that a company purchases and
plans to resell to customers at a higher
price.
• retailers and wholesalers are the only
businesses with merchandise inventory.
• Retailers, wholesalers, and distributors
buy goods from manufacturers and
actively market or merchandise the
goods to customers.
Consignment
Consignment refers to an
arrangement where goods are placed
in the care of store until the item is
bought by a buyer.
The owner of the goods — the
consignor – retains ownership of the
items until they sell.
When the item sells, the shop or
person who sold the product — the
consignee — would pay the owner an
agreed upon portion of the proceeds
from the sale.
Internal Controls for inventory are:
• Fence and lock the warehouse.
• Organize the inventory - number all locations, identify each inventory
item, and track these items by location.
• Count and Inspect all incoming inventory.
• Tag all inventory.
• Standardize record keeping for inventory picking.
• Sign for all inventory removed from the warehouse.
• Conduct cycle counts
The Importance of Inventory Control
Inventory control helps companies buy the right amount of inventory at
the right time. Also called stock control, the process helps optimize
inventory levels, reduces storage costs and prevents stockouts.
Inventory Accounting Systems
(Accounting Methods of recording Merchandise Inventory Transactions)
 Illustrative Problem
Perpetual Periodic
Debit Credit Debit Credit
On Dec 1, Purchased 1,000 units of merchandise at P30 per unit, from AA Supply
Terms: 15 days; FOB Shipping Point, Freight Collect Merchandise Inventory 30,500 Purchases 30,000
Paid shipping fee, P500 Accounts Payable 30,000 Freight-in 500
(1,000 units x P30) Cash 500 Accounts Payable 30,000
Cash 500
On Dec 2, Returned 100 units of defective merchandise to Supplier
(100 units x P30) Accounts Payable 3,000 Accounts Payable 3,000
Merchandise Inventory 3,000 Purchase Returns 3,000
 Perpetual Periodic
Debit Credit Debit Credit
On Dec 10, Sold 200 units of merchandise at P50 per unit on credit to Customer Co.
(200 units x P50) Accounts Receivable 10,000 Accounts Receivable 10,000
Sales 10,000 Sales 10,000

Cost of Goods Sold 6,000

Mdse Inventory 6,000
On Dec 12, customer returned 10 units of defective merchandise
Sales Returns/Allowance 500 Sales Returns/Allowance 500
Accounts Receivable 500 Accounts Receivable 500

Mdse Inventory 300

Cost of Goods Sold 300
 Perpetual Periodic
Debit Credit Debit Credit
On Dec 16, paid AA Supply
30,000 - 3,000 Accounts Payable 27,000 Accounts Payable 27,000
Cash 27,000 Cash 27,000
On Dec 17, received full payment of Customer Co.
Cash 9,500 Cash 9,500
Accts. Receivable 9,500 Accts. Receivable 9,500
 Perpetual Periodic
Debit Credit Debit Credit
On Dec 31, Adjusting entry to update inventory balances
Merchandise Inventory 21,800
No Entry Purchases 21,800

Cost of Goods Sold 5,700

Purchases 5,700