CHAPTER 8 Recording and Measuring Inventory

CHAPTER 8 Recording and Measuring Inventory - Inventories:...

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Inventories: Measurement RECORDING AND MEASURING INVENTORY TYPES OF INVENTORY There are two types of inventories depending on the kind of business operation. Merchandise Inventory A merchandising concern buys and resells inventory in the ordinary course of business. Merchandise inventory is reported in the balance sheet as a current asset. Manufacturing Inventory A manufacturing concern purchases raw materials ( Raw Materials Inventory ), combines it with labor and factory overhead ( Work in Process Inventory ) and then sells the finished product ( Finished Goods Inventory ) to its customers. At the end of each accounting period each category of inventory is reported as a current asset in the balance sheet. CONTROL There are two types of inventory systems that are used in maintain accounting records and report inventory in the financial statements. Perpetual System Under the perpetual inventory system the entity maintains a continuous record of the balance in the Inventory account and the Cost of Goods Sold account through out the accounting period. a) Raw materials or merchandise purchases are charged to Raw Materials or Merchandise Inventory respectively as the purchases are made. b) Freight-in, purchase returns and allowances and purchase discounts are recorded in the inventory account. c) As each sales transaction is recorded the Inventory account is credited for the cost of the item and the Cost of Goods Sold account is debited. d) Inventory is a control account, which is supported by a detailed subsidiary ledger. Periodic System Under the periodic inventory system the inventory account reflects the beginning balance of inventory. Throughout the accounting period purchases, freight-in, purchase returns and allowances and purchase discounts are recorded in separate expense accounts. At the end of the accounting period a physical inventory is taken and the inventory account is adjusted to reflect the correct ending inventory. Example of the year-end adjusting journal entries: Date Account Debit Credit End of year Income summary Beginning inventory Inventory Beginning inventory To remove beginning inventory from general ledger inventory account. F:\Teaching\3321\web\module4\c8\tnotes\c8a.doc 3/12/2007 1
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Inventories: Measurement Date Account Debit Credit End of year Inventory Ending inventory Income summary Ending inventory To record ending inventory in general ledger inventory account. Both the debit and credit are entered in the income summary account because we need both amounts in order to prepare a multi-step income statement. The debit and credit balances in the income summary account combined with the temporary expense accounts result in the computation of cost of goods sold as reported in the income statement at year-end. In the income summary account the debit reflects beginning inventory and the credit reflects ending inventory. PHYSICAL QUANTITIES INCLUDED IN INVENTORY
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CHAPTER 8 Recording and Measuring Inventory - Inventories:...

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