Scribd
Upload
218 views

Accounting For Inventory

This document discusses accounting for inventory. It explains that inventory accounting involves determining ending inventory unit counts and assigning a value. Companies use either a periodic or perpetual system to track inventory levels. The physical count or estimates are used to determine ending balances, which are then valued using cost layering methods like FIFO or standard costs. Overhead must also be allocated to inventory, and there are additional issues for obsolete, damaged, or joint products.

Uploaded by

Reika Ogalisco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
218 views

Accounting For Inventory

This document discusses accounting for inventory. It explains that inventory accounting involves determining ending inventory unit counts and assigning a value. Companies use either a periodic or perpetual system to track inventory levels. The physical count or estimates are used to determine ending balances, which are then valued using cost layering methods like FIFO or standard costs. Overhead must also be allocated to inventory, and there are additional issues for obsolete, damaged, or joint products.

Uploaded by

Reika Ogalisco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Accounting for inventory

October 19, 2021

How to Account for Inventory

The accounting for inventory involves determining the correct unit counts comprising ending
inventory, and then assigning a value to those units. The resulting costs are then used to record
an ending inventory value, as well as to calculate the cost of goods sold for the reporting period.
These basic inventory accounting activities are expanded upon below.

Determine Ending Unit Counts

A company may use either a periodic or perpetual inventory system to maintain its inventory
records. A periodic system relies upon a physical count to determine the ending inventory
balance, while a perpetual system uses constant updates of the inventory records to arrive at the
same goal.

Improve Record Accuracy

If a company uses the perpetual inventory system to arrive at ending inventory balances, the
accuracy of the transactions is paramount.

Conduct Physical Counts

If a company uses the periodic inventory system to create ending inventory balances, the
physical count must be conducted correctly. This involves the completion of a specific series of
activities to improve the odds of counting all inventory items.

Estimate Ending Inventory

There may be situations where it is not possible to conduct a physical count to arrive at the
ending inventory balance. If so, the gross profit method or the retail inventory method can be
used to derive an approximate ending balance.

Assign Costs to Inventory


The main role of the accountant on a monthly basis is assigning costs to ending inventory unit
counts. The basic concept of cost layering, which involves tracking tranches of inventory costs,
involves the first in, first out (FIFO) layering system and the last in, first out (LIFO) system. A
different approach is the assignment of a standard cost to each inventory item, rather than a
historical cost.

Allocate Inventory to Overhead

The typical production facility has a large amount of overhead costs, which must be allocated to
the units produced in a reporting period.

Additional Inventory Accounting Issues

The preceding points cover the essential accounting for the valuation of inventory. In addition,
it may be necessary to write down the inventory values for obsolete inventory, or for spoilage or
scrap, or because the market value of some goods have declined below their cost. There may
also be issues with assigning costs to joint and by-product inventory items. We expand upon
these additional accounting activities in the following bullet points:

 Write down obsolete inventory. There must be a system in place for identifying obsolete
inventory and writing down its associated cost.

 Review lower of cost or market. The accounting standards mandate that the carrying
amount of inventory items be written down to their market values (subject to various
limitations) if those market values decline below cost.

 Account for spoilage, rework, and scrap. In any manufacturing operation, there will
inevitably be certain amounts of inventory spoilage, as well as items that must be
scrapped or reworked. There is different accounting for normal and abnormal spoilage,
the sale of spoiled goods, rework, scrap, and related topics.

 Account for joint products and by-products. Some production processes have split-off
points at which multiple products are created. The accountant must decide upon a
standard method for assigning product costs in these situations.

 Disclosures. There are a small number of disclosures about inventory that the accountant
must include in the financial statements.
https://www.accountingtools.com/articles/accounting-for-inventory.html

You might also like