Inventory is reported under Current Assets in the financial statements. A business can sell products and/or services. If a business sells a product, it needs to account for its inventories.
Types of Inventories
A Merchandising or Trading Company - buys finished goods and sell them as is.
A Manufacturing Company - produces its products and then sells them. Here inventory is further classified as Raw Materials, Work in Progress and Finished Goods.
Two Types of Inventory System
1. Periodic Inventory System- inventories are physically counted and only updated periodically
2. Perpetual Inventory System- - keeps track of inventory balances whenever there is movement in inventory (sales and purchases)
Periodic vs Perpetual
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PERIODIC |
PERPETUAL |
|
We
debit "Purchases" account to record purchase of
inventories. |
We
directly debit "Inventories" account for inventory
purchases. |
|
Cost of
Sales is computed on a periodic basis. Cost of
Sales =Beginning Inventory + Purchases - Ending Inventory |
The formula for Cost of Sales is not needed under Perpetual system. Instead, each sale will require two journal entries (1) to record sales (2) to record Cost of Sales.
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