Inventory

what is inventory account?

Inventory includes both the raw materials necessary to make finished items and the finished goods themselves. On a company’s balance sheet, it’s listed as a current asset. Natural materials, work-in-progress, and finished commodities are all sorts of inventory.

Inventory, as an Financial Account and including under Current Asstes, refers to all stock in different phases of production and is a current asset. By maintaining inventory, merchants and manufacturers may continue to sell and develop products. Inventory includes both the raw materials necessary to make finished items and the finished goods. On a company’s balance sheet, it is listed as a current asset. Natural materials, work-in-progress, and finished commodities are different types of inventory.

TYPES OF INVENTORY MANAGEMENT:

The different types of inventory management are as follows:

  • Raw material.
  • Components
  • Work in process
  • Finished goods
  • MRO goods

PERIODIC AND PERPETUAL INVENTORY SYSTEM:

In the periodic inventory system /method, all purchases must be documented in a purchasing account between physical inventory counts in order to be included. Whenever a physical inventory count is carried out, the balance in the purchasing account is subsequently transferred to the inventory account and modified to meet the ending inventory cost.

The cost of good sold (CGS) is calculated in the periodic inventory system are:

Beginning inventory + Purchases = Cost of goods available for sale

Cost of goods available for sale – Ending inventory = Cost of goods sold

A perpetual inventory system uses electronic data instead of a physical inventory to estimate your inventory over time. Small businesses can benefit from periodic inventory accounting systems, but larger companies with several retail locations (such as supermarkets or pharmacies) will need everlasting inventory systems.

During the course of a perpetual LIFO system, the expenses that are most recently accessible at the time of sale are the first that software transfers from the inventory account and debits from the COGS account.

INVENTORY TURNOVER PERIOD DAYS:

When a business can sell (turn over) its inventory quickly, it has a high inventory turnover. DSI measures the average time it takes for a company to convert its list into sales.

inventory

(Inventory / COGS) * 365

PERIODIC INVENTORY SYSTEM EQUATION:

Calculate the cost of goods available for sale (COGAFS) using the following formula: Adding the beginning inventory (BI) and the cost of purchases (P) for the period results in the total cost of goods sold (COGAFS = BI + P).

ENDING INVENTORY IN TRIAL BALANCE:

Closing stock refers to the unsold inventory from purchases made during the period under consideration. Since total assets are already included in the trial balance, the closing stock should not be added to it. The formula to calculate the ending inventory is:

ending inventory = Beginning inventory + net purchases – COGS 

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