TOPIC 9: INVENTORIES

LEARNING OUTCOMES:
For the students to be able to:
1.Understand the concept Inventories
2.To know major classes of inventory
3. Learn systems of recording inventories

INTRODUCTION
Inventories according to Valix, 2017 are assets held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the production process or in
the rendering of services.

Classes of Inventories
1. Inventories of trading concern
2. Inventories of manufacturing concern

Inventories of trading concern are called merchandise inventory

Inventories of Manufacturing concern are:

1. Finished goods
2. Goods in process
3. Raw materials
4. Factory or manufacturing supplies

Owner of the goods in transit

If term of purchase is FOB destination, the owner is the Seller but if FOB shipping point, the owner is the
Buyer.

Goods on consignment

For goods on consignment, such shall be included in the consignor’s inventories and excluded from the
consignee’s inventory.

COURSE WORK (ACTIVITY AND DISCUSSION)

Accounting for inventories

Two systems are offered in accounting for inventories, namely :

1. Periodic system 2. Perpetual system

The periodic system calls for the physical counting of goods on hand at the end of the accounting period to
determine quantities. This is generally used when the individual items have small peso investment such as
groceries, hardware and auto parts.

Perpetual system requires the maintenance of records called stock cards that usually offer a running summary of
the inventory inflow and outflow.
Illustration

Transactions Periodic System Perpetual System

1. Purchase of merchandise on Purchases 300,000 Merchandise Inventory 300,000
account- P 300,000 Accounts Payable 300,000 Accounts Payable 300,000
2. Payment of freight on the Freight in 20,000 Merchandise Inventory 20,000
purchase – P 20,000 Cash 20,000 Cash 20,000
3. Return of merchandise purchased Accounts Payable 30,000 Accounts Payable 30,000
to supplier- P 30,000 Purchase return 30,000 Merchandise Inventory 30,000
4. Sale of merchandise on account- Accounts Receivable 400,000 Accounts Receivable 400,000
P400,000 at 40% gross profit Sales 400,000 Sales 400,000

Cost of goods sold 240,000

Merchandise inventory 240,000
5. Return of merchandise sold from Sales return 25,000 Sales return 25,000
customer- P 25,000 Accounts Receivable 25,000 Accounts Receivable 25,000

Merchandise Inventory 15,000

Cost of goods sold 15,000

6. Adjustment of ending inventory, Merchandise inventory 65,000 No entry

P 65,000 Income summary 65,000 As a rule, the ending inventory is not
adjusted. The balance of the merchandise
inventory accounts represent the ending
inventory.

Inventory shortage or overage

Ex. If the physical count at the end of the accounting period indicates a different amount, an adjustment is made
to recognize any inventory shortage or overage.
Ex. If the physical count is only P55,000 then adjustment is:
Inventory shortage 10,000
Merchandise inventory 10,000

Methods of Recording Purchases

1. Gross Method
2. Net Method

Transactions Gross Method Net Method

1.Purchase on account, P200,000 2/10, Purchases 200,000 Purchases 196,000
n/30 Accounts Payable 200,000 Accounts Payable 196,000
2.Payment is made within the discount Accounts Payable 200,000 Accounts Payable 196,000
period Cash 196,000 Cash 196,000
Purchase discount 4,000
3.Payment is made beyond the discount Accounts Payable 200,000 Accounts Payable 196,000
period. Cash 200,000 Purchase discount lost 4,000
Cash 200,000
If it is the end of the accounting period and
no payment is made and the discount
period has expired:

Purchase discount lost 4,000

Accounts Payable 4,000

Cost of inventories shall comprise:

a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventories to their present location and condition.