Inventory Meaning And Explanation With Examples

Inventory or Stock or Merchandise means those goods or material used in the production of goods being held for resale purposes or remained unsold at the end of Accounting Cycle. Inventory is a Current Asset. For Example, Mr. A, as a retailer started his business with Cash Rs. 200000. Then, he Purchased 10 Chairs for Total amount of Rs. 100000 at the rate of Rs. 10000 each for resale purposes. He decided to sell Chairs at the of Rs. 15000 each. Only 5 Chairs are sold. So, at he end of Accounting Period, 5 Chairs remains unsold. In this case, 5 Chairs which remain unsold is Closing Inventory or Closing Stock for the business.

Inventory Journal Entry

When goods purchased for resale purposes, then inventory takes into place. Eventhough it is called purchases but it is added to the Beginning Inventory of Previous Accounting Cycle. For Example, Mr. A Purchased Goods worth Rs. 50000 For Cash, then following Accounting Journal Entry is recorded in the Journal of Business:

                                          Purchases a/c   50000

                                                              Cash a/c   50000

(Inventory or Goods Purchased For Cash)

Inventory T Account

Inventory T Account or Ledger is prepared to make proper record of Business Transactions related to Inventory. In Inventory T Account, Beginning Inventory shows the goods remain unsold from previous Accounting Period, Purchases shows new fresh stock bought during the current accounting period and closing stock shows the goods remain unsold during the Current Accounting Cycle.

 

                                                             ABC Company

                                                           Inventory Account

                                                     For The Month August, 2018

                                  Rs.                                                                          Rs.

Opening Balance     XXX

Purchases                XXX

                                                                                Closing Balance      XXX

Inventory Adjustment Journal Entries

If there is a Perpetual Inventory System, then there is no need to make Adjustments as this system maintains the inventory up to date. But for Periodic Inventory System, there is need to pass Inventory Adjustments. So, at the end of Accounting Cycle, there is need to adjust the value of Closing Inventory due to Matching Principle Gaap i.e., we need to Calculate Cost of Goods Sold in order to match revenue with all those Expenses incurred in earning that particular Revenue. By Taking our previous above example, if Mr. A purchased 10 (at the rate of Rs. 10000 each) Chairs and at the end of Accounting Cycle, only 5 chairs sold at the rate of Rs. 15000 each, then we need to make adjustments of 5 chairs revenue with 10 chairs purchased, so we pass following two Inventory Adjusting Entries.

1.

                   Income Statement a/c   100000 (10 X 10000)

                                                   Purchases a/c 100000

(10 Chairs Purchased at the Rate of Rs. 10000 Each Transferred to Income Statement)

2. 5 Chairs remains Unsold costing Rs. 10000

                          Closing Inventory a/c   50000 (5 X 10000)

                                                         Income Statement a/c        50000

(Portion of Unsold Goods Recorded at Cost To Find Out Cost of Sales)

As, we know 5 chairs sold at the rate of Rs. 15000 each, then Sales is Rs. 75000. This Sales should match with total cost of Chairs Purchased Rs. 100000 according to Matching Principle.

The above adjustment process can be written in the form of Equation as shown below:

Cost of Sales Calculation

                                                 Rs.

Opening Inventory                   Nill

+ Purchases                          100000

- Closing Inventory                 50000

                                            _________

  Cost of Sales                        50000

                                            __________

                                            __________

 

So, Inventory is very important factor in accounting which is held for resales purposes or remains unsold at the end of Current Accounting Cycle.