INVENTORY

 Inventory is an accounting term that

refers to goods, which are held by a
business with the intention of resale.
 They include:
 finished goods and
 partly finished goods or raw materials
awaiting conversion into finished
goods,
 which will then be sold.
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 Increase in Inventory:
 This results from two activities:

1. Purchase of goods and

2. The return of goods to the business
previously sold. There are various
reasons for return of goods by
customers such as wrong
specification, excess supply,
damaged items etc.
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 To capture and distinguish the above-
mentioned two activities, two
separate accounts are opened,
namely,
1. Purchases Account (To record
purchase of goods)
2. Returns Inwards Account (Sales
Returns) (To record goods returned by
customers)
 INVENTORY
 Decrease in Inventory:
 This results from two activities:

1. Sale of goods
2. Goods previously bought by the
business, now being returned to
suppliers for reasons such as wrong
specification, damaged goods etc.
 INVENTORY
 To capture and distinguish the above-
mentioned two activities, two
separate accounts are opened,
namely,
1. Sales Account (To record sale of
goods)
2. Returns Outwards Account
(Purchases Returns) (To record goods
returned by business to suppliers)
 INVENTORY
 PURCHASES
 In accounting, the term “Purchases”
refers to purchase of those goods,
which the business buys, with the sole
intention of selling them.
 On the other hand, if an item of asset is
bought, say a motor van by a retail
trader for use in the business and not
for resale, such an item will not be
included under “Purchases”.
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 SALES
 The term “SALES” in accounting refers
to sale of those goods in which the
business normally deals and which
were bought with the sole intention of
resale.
 On the other hand, if a business sells
some old furniture after being used for
sometime, such an activity will not
described as “Sales”.