Inventory accounting

Inventory accounting
See also
Finished goods inventory Conversion cost Biological assets Accounting Principles Amortization of intangible assets Standard price Productize Income from operations Distribution cost

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.

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