Inventory accounting

Inventory accounting is part of accounting activities in a company that refer to changes in inventoried assets. Typical company inventory are:

• raw goods,
• in-progress goods,
• finished goods.

The role of inventory accounting is to assign value to those types of inventory. The volume of each type of inventory is under continuous change, as the production and sales processes progress. Therefore, it is important to define the date on which the inventory accounting report was prepared.

General accounting rules (GAAP) define how to properly account inventory. The risk is that wrong inventory accounting can impact on overstatement of company value (too much value assigned to inventory).

Raw goods

Raw material - material intended for further processing. Raw materials are products of the mining industry, agriculture, forestry or are created as a result of waste processing:

1. energy resources,
2. recyclable materials,
3. non-renewable resources,
4. renewable raw materials.

In-progress goods

These products, which were previously past the stage of production and production. There are also products that process uncompleted. Work in progress also includes:

1. materials - they are purchased for own consumption purposes, they include basic materials, auxiliary materials and materials on the way,that is, those that have not yet been accepted into the warehouse
2. finished products - are products intended for sale,
3. goods - these are assets purchased for sale and are mainly found in trading companies,
4. advance payment for deliveries.

Finished goods

Finished products - a component of current assets, included in inventories. Finished products are included in the group of finished products, equally with completed robots and services. So ready products are such components of current assets that have gone through all production phases and meet all previously assumed quality and technical standards.

Accounting evidence related to the movement of finished products in the enterprise:

1. when adopting finished products from production - single or multi-sentence evidence Acceptance of products - Pw,
2. when accepting returns of finished products questioned by the recipient - proof of Pz.

To be in contact with the sale of finished products, a document confirming this event is needed. VAT invoice is such a document. An additional document for the sale of finished products is the Wz document (it may refer to the issue of products directly from production or from the warehouse). Therefore, the sale of finished products is a process in which we book two economic events that do not have to be on the same day.

1. Revenue from the sale of products, where the invoice issued by the seller is the basis,
2. Expenditure of sold products, where the basis of the document is Wz.

In the case of retail sales, their expenditures are filled up like expenditures of materials, like modern methods:

1. FIFO - "first come - first came",
2. LIFO - "the last came - the first came",
3. "average prices" method.

Examples of Inventory accounting

• Raw materials and components: These are the basic materials used to manufacture a final product. Examples include plastics, metals, chemicals, and paper.
• Finished goods: Products that have been manufactured and are ready for sale. Examples include clothing, electronics, furniture, and appliances.
• Work in progress (WIP): This refers to goods that are in the process of being manufactured. Examples include partially assembled products, parts that need to be put together, and products that require further finishing.
• Supplies: These are materials that are used in the production process but are not part of the finished product. Examples include tools, office supplies, cleaning supplies, and packaging material.
• Spare parts: These are parts that are used to replace defective or damaged components in a product. Examples include engines, motors, and other components.

Advantages of Inventory accounting

Inventory accounting is a critical part of accounting activities in a company as it records changes in inventoried assets. The following are some of the advantages of inventory accounting:

• It helps to track the cost of goods sold and the value of the company’s inventory. This helps in making informed decisions about purchasing, pricing, and profit margins.
• It also provides a better understanding of the performance of the company’s inventory management system. This helps to identify areas of inefficiency and make necessary improvements.
• Inventory accounting also enables businesses to ensure the accuracy of their financial statements by providing a detailed account of the company’s inventory and its value.
• Furthermore, inventory accounting is also important for tax purposes as it helps to determine the value of the company’s inventory for tax deductions.
• Lastly, inventory accounting helps to identify areas of over-stocking or under-stocking, allowing businesses to optimize their inventory management accordingly.

Limitations of Inventory accounting

Inventory accounting is part of accounting activities that refer to changes in inventoried assets. Typical company inventory includes raw materials, work-in-progress, finished goods, and supplies. However, there are several limitations associated with inventory accounting that companies should be aware of in order to ensure accurate accounting practices. These limitations include:

• A need for accurate tracking of inventory levels: Companies must maintain accurate inventory records in order to ensure that their inventory figures are accurate and up to date. Without accurate tracking, the company cannot properly account for changes in inventory levels.
• Difficulty accounting for inventory that is used in multiple products: Companies may have difficulty accounting for inventory that is used in multiple products, as it may be difficult to determine the exact amount of inventory used in each product.
• Costs associated with inventory management: Companies must also consider the costs associated with inventory management, such as the costs of storing and tracking inventory, in order to ensure profitability.
• Inventory valuation: Finally, companies must ensure that their inventory is valued accurately in order to ensure accurate financial reporting. Inaccurate valuation of inventory can lead to inaccurate financial statements, which can create problems for the company.

Other approaches related to Inventory accounting

Inventory accounting is an important component of accounting activities in a company and it deals with changes in inventoried assets. Other approaches related to inventory accounting include:

• Costing methods - This includes different methods used to measure and record the cost of inventory, such as the first-in-first-out (FIFO) method and the last-in-first-out (LIFO) method.
• Valuation - This involves recording the value of inventory in the balance sheet at the end of each accounting period. This can be done using various methods such as the weighted average cost method and the retail inventory method.
• Inventory analysis - This involves analyzing inventory trends and data to identify areas of inefficiency and opportunities for improvement. This can include analyzing the cost of goods sold (COGS), the amount of inventory on hand, and the average inventory turnaround time.
• Cycle counting - This involves regularly counting inventory to ensure accuracy and maintain control over inventory levels. This can include counting specific items on a regular basis or counting the entire inventory at once on a periodic basis.

In summary, inventory accounting involves tracking changes in inventoried assets, as well as other activities such as costing methods, valuation, inventory analysis and cycle counting. These activities are necessary for accurate financial reporting and keeping track of inventory levels.

Inventory accounting — recommended articles

Operating cycle — Stock register — Opening stock — Inventory value — Cost element — Inventory record — Subsidiary account — Finished goods inventory — Accounting Principles

References

• Agnes Cheng, (2000). The Valuation Accuracy of the Price-Earnings and Price-Book Benchmark Valuation Methods Review of Quantitative Finance and Accounting): 349-370
• Andersson, Thomas; Fredriksson, Torbjörn; Leung, Zabrina. Distinction between Intermediate and Finished Products in Intra-Firm Trade Provided in Cooperation with: Research Institute of Industrial Economics (IFN), Stockholm.
• Cachon G. P. and M. Olivares, (October 2006; revised January 2008). Drivers of finished goods inventory in the U.S. automobile industry Columbia Business School.
• Clifford E. Cummings, Sunburst Design Simulation and Synthesis Techniques for Asynchronous FIFO Design Expert Verilog, SystemVerilog & Synthesis Training
• David Coffee. The Materiality of LIFO Accounting Distortions on Liquidity Measurements Journal of Finance and Accountancy.
• Helga Weisz, (January 2006 ). Accounting for raw material equivalents of traded goods pp: 2-20
• Josephson G. W., Mineral Raw Materials pp.426-431
• Muthittin Oral,Michael S.Salvador,Arnold Reisman and Burton V.Dean, (February, 1972). On the Evaluation of Shortage Cost for Inventory Control of Finished Goods Vol. IS, No. 6
• Richard E. Speidel, (May 1964). Advance Payments in Contracts for Sale of Manufactured Goods: A Look at the Uniform Commercial Code pp. 281-305.
• Rozhkova, N. K. (2015). Synthetic and Analytical Accounting Of Inventory as a Tool to Improve Inventory Accounting System in Vietnam. Journal of Economics, Business and Management, pp: 489-492.

Footnotes

Author: Magdalena Pawłowska