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CHAPTER 3

INVENTORIES ACCOUNTING SYSTEM

Definition
Para 5 FRS 102 Inventories are assets: A) held for sale in the ordinary course of business B) in the process of production for such sale or C) in the form of materials or supplies to be consumed in the production process or in the rendering services

CLASSIFICATION
Para 11 FRS 102
Inventories should be measured at the lower of cost and Net Realizable value Net Realizable Value (NRV) is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

PERPETUAL & PERIODIC INVENTORY SYSTEM


There are two ways that a trader may maintain stock records: 1) Periodic stock record 2) Perpetual stock record
What you have learned before is maintaining stock records using periodic method

PERIODIC INVENTORIES RECORD


This method is usually used by firms selling goods that have a low individual unit value such as stationary. Close control of such items is not necessary nor it is economically sound. Under this system, no attempt is made to determine the cost of goods sold for each sale at the time of the sale. Instead, the cost of goods sold for all of the sales in a period is determined at the end of the period

Continued
In a periodic system, stock accounts at the beginning and at the end of the period. Any stock movement eill be recorded as follows:

Sales:
Debit Debtor Credit Sales (Being credit sales)

Continued
Sales:
Debit Debtor Credit Sales (Being credit sales)

Purchases Debit Purchases Credit Creditors (Being credit purchases)

Continued
Return inwards Debit Return inwards Credit Debtors (Being the return of goods sold)

Return outwards Debit Creditor Credit Return outwards (Being credit purchases)

Continued
At the end of a period, stock will be calculated manually and the value is recorded in a closing stock account. The same amount will be credited to Trading account to calculate the cost of goods sold.
Debit Closing stock Credit Trading (Being the closing stock at the end of a period)

Continued
Cost of goods sold will be calculated because there is no record kept. The calculation is
Opening Stock Add: Purchases
Cost of goods available for sale Less: Closing Stock COST OF GOODS SOLD

XXX XXX
XXX XXX XXX

PERPETUAL INVENTORIES RECORD


This method is usually used by firms selling goods that have a high individual unit value such as motor vehicles, furniture and electrical appliances.

In this stock system, a stock account is opened throughout the period to record about the stock movement. A Cost of Goods Sold account will be opened to record the cost of goods that has been sold. Unlike the periodic system, the value of cost of goods sold and the closing stock is really available in the books.

Continued
Any stock movement will be recorded as follows: Sales Debit Debtor Credit Sales (Being credit sales)

Debit Cost of Goods Sold Credit Stock (Being the cost of goods sold)

Continued
Purchases

Debit Stock Credit Creditors (Being credit purchases)

Return inwards Debit Stock Credit Debtor (Being the amount returned from customers)

Continued
Return outwards

Debit Creditor Credit Stock (Being the amount returned to suppliers)

DIFFERENCES BETWEEN PERPETUAL & PERIODIC INVENTORIES RECORD


Stock movement will be recorded in the following account: Sales, Purchases, Return inwards and Return outwards Cost of goods sold is determined by following calculation: Opening stock Add: Purchases Less: Closing Stock The closing stock is determined by manual counting of stock called as stocktaking Stock movements are recorded in a stock account. The stock account will be used throughout the period to record all sales, purchases and returns. Cost of goods sold is maintained The closing stock can easily be determined from the balance in the stock records.

PURCHASES OF GOODS (STOCKS)


PURCHASES OF GOODS ON CREDIT EFFECT Increase in Assets of stocks DEBIT CREDIT

Purchases
Creditor

Increase in Liability of creditor


PURCHASES OF GOODS ON CASH

EFFECT
Increase in Assets of stocks Decrease in Assets of cash

DEBIT
Purchases

CREDIT

Cash

SALES OF GOODS (STOCKS)


SALES OF GOODS ON CREDIT EFFECT Increase in Assets of Debtor DEBIT CREDIT

Debtor Sales

Decrease in Liability of stocks


SALES OF GOODS ON CASH

EFFECT
Increase in Assets of cash Decrease in Assets of stocks

DEBIT
Cash

CREDIT

Sales

RETURNS OF GOODS (STOCKS)


RETURN OUTWARDS FROM CREDIT PURCHASES EFFECT DEBIT CREDIT

Decrease in Liability of creditor Creditor

Decrease in Asset of stocks

Return outwards

RETURN OUTWARDS FROM CASH PURCHASES

EFFECT
Increase in Assets of cash Decrease in Assets of stock

DEBIT
Cash

CREDIT

Return outwards

CONTINUED
RETURN INWARDS FROM CREDIT SALES EFFECT Increase in Assets of stocks DEBIT Return inwards CREDIT

Decrease in Assets of Debtor


RETURN INWARDS FROM CASH SALES

Debtor

EFFECT
Increase in Assets of stocks Decrease in Assets of cash

DEBIT Return inwards

CREDIT

Cash

ACCOUNTING FOR STOCK


Stock Diagram
Purchased goods
SUPPLIER (CREDITOR) BUSINESS

Sold goods
CUSTOMER (DEBTOR)

ABC

Return outwards

Return inwards

CONTINUED
STOCKS/GOODS

INCREASE (+)

DECREASE (-)

Purchase of goods

Return inwards

Sales of goods

Return outwards

Recorded in the purchases a/c

Recorded in the Return inwards a/c

Recorded in the Sales a/c

Recorded in the Return outwards a/c