Acc 561 Week 6 Inventory Accounting

Paper #6 Inventory Accounting

Inventory accounting is exceedingly important to a firm because inventories are a significant asset to the firm both in absolute size and proportion to all of the firm’s other assets. Furthermore, selling inventories more than its cost price represents the main source of a firm’s sustainable income. For a typical wholesaler or retailer there is only one inventory account called the Merchandise Inventory. For a manufacturing company there are three categories of inventory accounts which are Raw materials inventory, Work-in-process inventory and Finished goods inventory (Revsine, Collins, Johnson, Mittelstaedt & Soffer, 2015).

The basic inventory accounting consists of determining the goods available for sale and the cost of goods sold. The goods available for sale is obtained by adding the beginning inventory to the inventory purchases and the cost of goods sold is determined by subtracting the ending inventory from the goods available for sale. Even though the basic inventory accounting seems to be simple,

A perpetual inventory system keeps a running record of the amount of inventory in hand. The physical amount of inventory on hand at any point should correspond to the unit balance in the inventory account. A periodic inventory system does not keep a running record of the dollar amount of the inventory on hand. In this system the ending inventory and cost of goods must be determined by physically counting the goods on hand at the end of the period. In periodic inventory system the cost of goods sold may not be accurate because the computation assumes that the goods not on hand when the physical count is taken were sold. There is no way to determine whether the goods not on hand were stolen or wasted (Revsine, et al, 2015). But a perpetual system gives more precise record since it tracks the inventory changes instantly (Ingram,