Principles of Accounting.doc - INVENTORIES INTRODUCTION In...

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INVENTORIESINVENTORIESINTRODUCTIONINTRODUCTIONIn the last section of Principles of Accounting I, you have learned about the principlesIn the last section of Principles of Accounting I, you have learned about the principlesand practices of accounting for receivables – one of the current asset items in the balanceand practices of accounting for receivables – one of the current asset items in the balancesheet of a retail business. In this unit you will learn and discuss the concepts insheet of a retail business. In this unit you will learn and discuss the concepts inaccounting for inventories.accounting for inventories.Inventories are asset items held for sale in the ordinary course of business or goods thatInventories are asset items held for sale in the ordinary course of business or goods thatwill be used or consumed in the production of goods to be sold. They are mainly dividedwill be used or consumed in the production of goods to be sold. They are mainly dividedinto two major:into two major:Inventories of merchandising businessesInventories of merchandising businessesInventories of manufacturing businessesInventories of manufacturing businessesi.i.Inventories of merchandising businesses are merchandise purchased for resaleInventories of merchandising businesses are merchandise purchased for resalein the normal course of business. These types of inventories are calledin the normal course of business. These types of inventories are calledmerchandise inventories.merchandise inventories.ii.ii.Inventories of manufacturing businesses manufacturing businesses areInventories of manufacturing businesses manufacturing businesses arebusinesses that produce physical output. They normally have three types ofbusinesses that produce physical output. They normally have three types ofinventories. These are:inventories. These are:Raw material inventoryRaw material inventoryWork in process inventoryWork in process inventoryFinished goods inventoryFinished goods inventory1.1.Raw material inventoryRaw material inventory-is the cost assigned to goods and materials on hand but not-is the cost assigned to goods and materials on hand but notyet placedinto production. Raw materials include the wood to make a chair or otheryet placedinto production. Raw materials include the wood to make a chair or otheroffice furniture’s, the steel to make a car etc.office furniture’s, the steel to make a car etc.2.2.Work in process inventoryWork in process inventory-is the cost of raw material on which production has beenis the cost of raw material on which production has beenstarted but not completed, plus the direct labor cost applied specifically to this materialstarted but not completed, plus the direct labor cost applied specifically to this materialand allocated manufacturing overhead costs.

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