Inventory & Accounting: Transactions & Financial Reporting
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
- Depreciate the asset for the period used since the last time it was depreciated.
- Credit the asset for its cost.
- Debit Accumulated Depreciation for the accumulated depreciation associated with that asset.
- Debit Cash.
- 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.