Chapter – 5

Accounting for Current Assets

Sr. No Chapter outline - Topics

96 Accounting for Inventories

97 Accounting for Goods in Transit

98 Accounting for Goods in Transit- Practice

99 Accounting for Consignment Sales

100 Accounting for Consignment Sales Practice

101 Right to Return Sales

102 Right to Return Sales Practice

103 Accounting for Inventories - Periodic and Perpetual

104 Inventories Valuation

105 Inventories Disclosure Requirements IAS 2

Topic Videos 096-105 are mandatory part of this chapter/module

Topic 96 – Accounting for Current Assets – Inventories

Current Asset

Generally, it is the resource that is recoverable/realizable within the upcoming 12-month period from
the reporting date or within the normal operating cycle of the entity.

Inventory

Inventory is the (current) asset that is held:

1. For sale in ordinary course of business;

2. In the process of production of such sales;

3. As material or supplies

Measurement of Inventories

Inventory is measured at lower of its cost and net realizable value.

Cost components

Cost of inventory includes:

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 1. Cost of purchase; and

2. Cost of conversion

a. Labour wages

b. Production overhead

Cost determining formulae

1. First in First out (FIFO)

2. Weighted Average (WA)

Accounting systems

1. Periodic

2. Perpetual

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Topic 97 – Accounting for Current Assets – Inventories – Goods in Transit

Recording of Inventory
Purchases and sales of inventory is recorded when legal title passes in or out.
It is necessary to determine when title passes.

Title Vs. Possession

It is misunderstood that title is synonymous with possession of goods in hand.
1. The goods in hand may not be owned; and
2. Goods that are not in hand may be owned.

Ownership of inventory
Confusion about proper ownership is:
1. Goods in transit
2. Consignment sales
3. Buyer having right of return

Goods in Transit
1. Seller has shipped but the buyer did not receive till the reporting date.
2. Goods in transit are included in the inventory of the party (buyer or seller) who is financially
responsible for transportation costs. This responsibility may be indicated by shipping terms.

Goods in Transit
Goods in Transit is considered as equivalent to inventory and is classified under the current assets.

For Seller
Goods in Transit for which goods have been dispatched but control has not been transferred:
Dr. Goods in Transit
Cr. Inventory/Purchase
For Seller
Upon sales, means transfer of control:
Dr. Cost of sales
Cr. Goods in transit
Dr. Accounts receivable
Cr. Sales
For Purchaser
Goods in Transit for which invoice has been received:
Dr. Goods in Transit
Cr. Accounts Payable
For Purchaser
Upon receiving possession of goods purchased:
Dr. Inventory/Purchase
Cr. Goods in Transit

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Topic 98 – Accounting for Current Assets – Inventories – Goods in Transit – Practice

Sample Co. shipped a truckload of corns costing Rs. 1 million in December 20X1 to its customer Simple
Co. at a selling price of Rs. 1.2 million, which remained in transit till 10th January 20X2.

Record entries if:

a) Seller bears shipping cost

Buyer bears shipping cost

Goods in Transit

Goods in Transit are considered as equivalent to inventory and classified under the current assets.

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Topic 99 – Accounting for Current Assets – Inventories – Consignment – Sales

Consignment Sales

Consignment sales is a situation where a party holds the goods to sell as an agent for the true owner.

Consigner & Consignee

Consigner (seller) ships goods to the consignee (buyer) for which title/control is not transferred
immediately because the buyer doesn’t want to invest cash in inventory and agrees to transfer title
when the goods are consumed.

Consignee’s Commission

Consignee may also act as an agent to sell the goods sent on behalf of consignee against a commission.

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Topic 100 – Accounting for Current Assets – Inventories – Consignment Sales – Practice

Scenario

Sample Co shipped 100 tons of its products to Simple Co. on consignment sales basis. Simple Co. does
not take title to such goods until these are consumed in its manufacturing process. The selling price for
one ton is set at Rs. 1,000. Sample Co.’s cost of one ton is Rs. 600.

Consignment Sales

Consignment sales is a situation where a party holds the goods to sell as an agent for the true owner.

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Topic 101 – Accounting for Current Assets – Inventories – Right to Return

Right to Return

Buyer is granted an exceptional right to return the merchandise acquired, whether found to be defective
or not, within a short time after delivery.

Possible Combination

Sale based on a right of return could be any combination of the following:

1. A full or partial refund of any consideration received.

2. A credit that can be applied against amounts owed.

3. Another product in exchange.

Accounting Effects

1. No revenue is recorded for the sales on right to return.

2. Recognise a refund liability if consideration has been received for such sales.

3. Recognise a contract asset and a corresponding adjustment to cost of sales upon confirmation.

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Topic 102 – Accounting for Current Assets – Inventories – Right to Return – Practice

Scenario

Sample Co shipped 1,000 cups to Simple Co. on right to return basis. Simple Co. paid 50% in advance.
The selling price for one tablet is set at Rs. 9,000. Sample Co.’s cost of one ton is Rs. 6,000.

Right to Return

Buyer is granted an exceptional right to return the merchandise acquired, whether found to be defective
or not, within a short time after delivery.

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Topic 103 – Accounting for Current Assets – Inventories

Objective
Accounting for inventories is required to match appropriate costs against revenues to arrive at the
correct gross profit and the accurate representation of inventories on hand as assets of at the end of the
reporting period.

Accounting System
Accounting for inventories is done under either:
1. Periodic system; or
2. Perpetual system.

Periodic Accounting System

Inventory accounting system that requires
each purchase of inventory to be
recognised as expense and to make a
period-end adjustment for inventory on
hand for matching cost of goods sold with
related revenue.

Perpetual Accounting System

Inventory accounting system that requires
each purchase of inventory to be recognised
as asset and to recognise cost of goods sold
upon each related revenue.

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Topic 104 – Accounting for Current Assets – Inventory Valuation

Measurement of Inventories
Inventory is measured at lower of its cost and net realisable value.

Cost Components
• Cost of purchase,
• Cost of conversion, and
• Other costs incurred in bringing the inventories to their present location and condition

Cost of Purchase
• Purchase price (less trade discounts, rebates, duty drawbacks and similar items),
• Irrecoverable taxes,
• Freight inwards,
• Handling and other costs directly attributable to their acquisition.

Cost of Conversion
Costs directly related to the units of production, such as direct labour and systematically allocated fixed
and variable production overheads incurred in producing finished goods.

Net Realisable Value

It is the estimated selling price less the estimated costs of completion and the estimated costs necessary
to make the sale.

Sample Co. has stock of finished goods on December 31, 2020 costing Rs 15,000 and work in process
inventory costing Rs. 10,000. The estimated cost to complete this work-in-process is Rs 5,000.
The company pays 20% commission on sales to its distributors. Estimated selling price of finished goods
and work in process (when this will be converted to finished goods) is Rs. 35,000.

Its NRV shall be calculated as under:

Sales price 35,000
Estimated cost of completion 5,000
Estimated cost to make sales (35,000 x 20%) 7,000 12,000
Net Realisable Value (NRV) 23,000

NRV of Raw Material

NRV of raw material is its replacement cost.

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Topic 105 – Accounting for Current Assets – Inventory – Disclosures

Disclosure Requirements

• Accounting policies adopted in measuring inventories, including the cost formula used;
• Total carrying amount of inventories and the carrying amount in classifications appropriate to
the entity;
• Carrying amount of inventories at fair value less costs to sell;
• Amount of inventories recognised as expense; and
• Amount of any write-down of inventories
• Information about the carrying amounts held in different classifications of inventories
• The inventories of a service provider may be described as work in progress.

Extract from Notes

(a) Inventories are measured at lower of cost and NRV. Cost is measured by using FIFO, formula.
(b) Inventories comprise the following:
Rs.’000’
Raw Material 5,400
Work in Process 6,200
Finished Goods 7,600
19,200

Extract from Notes

1. Carrying amount of finished goods carried at NRV is Rs. 2,000,000.

2. Inventories recognized as expense during the period are Rs. 403,000,000.
3. The amount of write-down of inventory (Finished goods) recognized as expense during the
period is Rs. 500,000.
4. There is reversal of write-down of Rs. 100,000.
5. Due to market fluctuations, finished goods are reversed from NRV to cost.
6. Stock is pledged as security against short term loan.

IAS 2

Accounting for Inventories is done under IAS 2.

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