Inventory & Accounting: Transactions & Financial Reporting

Posted on Mar 18, 2025 in Accounting and Finance

Inventory Accounting

Purchasing Inventory

  • Purchases
    • Debit Inventory
    • Credit Accounts Payable or Cash
  • Purchase Return
    • Debit Accounts Payable or Cash
    • Credit Inventory
  • Purchase Shipping
    • Debit Inventory
    • Credit Cash
  • Pay for Purchase
    • Debit Accounts Payable
    • Credit Cash
    • Credit Discount (if earned)

Impact on Inventory

  • Purchasing Inventory: Debit
  • Returning Inventory: Credit
  • Purchase Shipping: Debit
  • Purchase Discount: Credit

Sales Transactions

  • Sale
    • Debit Accounts Receivable
    • Credit Sales
    • Debit Cost of Goods Sold
    • Credit Inventory
  • Sales Return
    • Debit Sales Returns
    • Credit Accounts Receivable
    • Debit Inventory
    • Credit Cost of Goods Sold
  • Sales Shipping Costs
    • Debit Freight Expense
    • Credit Cash
  • Receive Payment
    • Debit Cash
    • Debit Sales Discounts (if earned)
    • Credit Accounts Receivable

Multi-Step Income Statement

  • Sales Revenue
    • Less: Sales Discounts
    • Less: Sales Returns
    • = Net Sales Revenue
    • Less: Cost of Goods Sold
    • = Gross Profit
    • Less: Operating Expenses
    • = Income from Operations
    • Add or Subtract: Other Gains or Losses
    • = Income Before Taxes
    • Less: Income Tax
    • = Net Income

Key Profitability Ratios

  • Gross Profit Rate: Gross Profit / Net Sales
  • Profit Margin Rate: Net Income / Net Sales

Inventory Costing Methods

  • FIFO (First-In, First-Out)
    • Oldest inventory is sold first.
    • Newest inventory is in ending inventory.
  • LIFO (Last-In, First-Out)
    • Newest inventory is sold first.
    • Oldest inventory is in ending inventory.
  • Average Cost
    • Weighted Average Cost per Unit: Total Inventory Cost / Total Inventory Units
  • Lower of Cost or Market
    • If the market value of inventory declines below its cost, it must be written down to the market value.

Internal Control

  • Establishment of Responsibility
  • Segregation of Duties
  • Documentation
  • Physical Controls
  • Independent Internal Verification
  • Human Resource Controls
  • Reporting Cash
    • Cash Equivalents
    • Restricted Cash

Bank Reconciliation

Adjustments to Bank Balance

  • Subtract: Outstanding Checks
  • Add: Deposits in Transit

Adjustments to Book Balance

  • Subtract: Bank Fees
  • Subtract: NSF Checks
  • Correct Errors
  • Add: Direct Collections
  • Add: Interest

Bad Debt Expense

  • Record Bad Debt Expense
    • Debit: Bad Debt Expense
    • Credit: Allowance for Doubtful Accounts
    • Performed at the end of the year.
  • Record Account Write-Off
    • Debit: Allowance for Doubtful Accounts
    • Credit: Accounts Receivable

Presentation of Accounts Receivable on Balance Sheet

Asset Costs

Costs Included in an Asset

  • All costs associated with obtaining the asset and preparing it for use.
  • Costs that change the nature of the asset.

Costs Not Included in an Asset

  • Costs needed to maintain the asset.
  • Costs repeated each year.

Straight-Line Depreciation

(Cost – Salvage Value) / Useful Life x (Months in Year Owned / 12)

Disposing of an Asset

Book Value = Cost – Accumulated Depreciation

Steps to Record Disposal

  1. Depreciate the asset for the period used since the last time it was depreciated.
  2. Credit the asset for its cost.
  3. Debit Accumulated Depreciation for the accumulated depreciation associated with that asset.
  4. Debit Cash.
  5. Debit Loss or Credit Gain for the amount necessary to make debits equal credits.

Intangible Assets

  • Definition of intangible assets
  • Amortizing intangible assets
  • Presenting Property, Plant, and Equipment, and Intangible Assets on the balance sheet.