11: Inventory

• Inventory defintion

  • assets that are held for sale in the ordinary course of business
  • are in the process of production for such sale
  • are in the form of materials or supplies to be consumed in the production process or in the rendering of services
• Recognition: expense


  inventory sold

  CA must be recognised as an expense in the period in which the inventory is sold
• Recognition: Asset


  The carrying amount of unsold, unfinished and unused inventory must be recognised as a current asset
• Inventory is recorded at the lower of cost price and net realisable value(NRV)
• Cost price

  includes all the costs incurred to bring the inventory to its present location and condition(ready for sale)
• Net realisable value

  The estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale
• The write-down of inventory will always be recorded as

  Dr cost of sales

  Cr Inventory
• free on board departure

  ownership transfers to the enterprise when the supplier delivers the goods at the point of departure
• free on board arrival

  ownership transfers to the buyer on receipt at point of arrival
• perpetual inventory system

  a continuous record of the inventory on hand

  Inventory account=main account
• Periodic Inventory system

  Inventory system where inventory count is updated periodically(or at the end of the period)

  Cost of sale account=main account

  Purchases recorded in separate account
• Closing off: Perpetual

  INVENTORY: purchase returns

  SALES: sales returns & discount allowed

  COS: discount received

  TRADE: sales & cos

  P/L: trade & all remaining income & expenses

  CAPITAL: p/l & CC & withdrawals
• Closing process: Periodic


  PURCHASES: purchase returns & discount received

  SALES: sales returns & discount allowed

  COS: O/B & C/B inventory, purchases & other

  TRADE: sales & cos

  P/L: trade & all remaining income + expenses

  CAPITAL: p/l & CC & withdrawals
• cost of sales amounts are recorded at

  cost price
• Sales amounts are recorded at

  selling price