Class 7

Inventories

INVENTORIES
After studying this chapter, you should be able to:
1 2 3 4 5 What inventories are? Classification of inventories How the inventories are valuated? How it works inventories account? Accounting transactions with inventories

WHAT INVENTORIES ARE?

list of goods and materials, available in stock, held by a company:

asset items held for sale in the ordinary course of business goods that will be used or consumed in the production of goods to be sold

Structure of INVENTORIES
Raw materials - materials and components scheduled for use in manufacturing process (wood for furniture, steel for cars , brick for houses s.o.) Work in progress, WIP - materials and components that have begun their transformation to finished goods but which are not yet finished (walls for houses). Finished goods - goods ready for sale to customers. (houses) Goods (merchandise) for resale - Good purchased for resale (a house for a real estate company)

VALUATION OF INVENTORIES
Inventories (raw material, finished goods, goods for resale) are valuated at COST:

Cost of purchase (for raw materials)= invoice price + other costs (transportation, taxes, s.o)
Product cost (for finished googs) = all charges which include direct materials, direct labor, and manufacturing overhead costs (indirect labor, and such items as insurance, electricity) Selling price (goods for resale) = cost of purchase + commercial addition (%) + VAT (24%)

INVENTORIES ACCOUNTS
ACCOUNTS 301 Raw materials 302 Consumables 331 Work in progress 345 Finished goods Tipe A A A A

371 Goods purchased for resale

378 Prices differences on goods purchased for resale 4428 VAT under settlement

A
E&L E&L

This class of inventories account works like assets account

Debit (+)
Purchase of inventories (raw materials, consumables, goods for resale) Inventories = Accounts payable Obtaining inventories (work in progress or finished goods) from manufacturing process Inventories = Potential revenues Receiving inventories from shareholders Inventories = Receivable face to shareholders

Credit (-)
Disposal (exit) of inventories because of consumption (raw materials, consumables) or sale (finished goods or goods for resale) Expenses = Inventories

Debit balance represents the total value of inventories held by company

INVENTORIES ACCOUNTS
ACCOUNTS 301 Raw materials 302 Consumables 331 Work in progress 345 Finished goods 371 Goods purchased for resale 378 Prices differences on goods purchased for resale 4428 VAT under settlement Tipe A A A A A E&L E&L

378 Prices differences on goods purchased for resale - represent commercial addition (potential gain obtained by the company after the selling process )

Credit (+)
increase with the value of commercial addition of goods for resale purchased Goods for resale = Commercial Addition (Prices differences)

Debit (-)
Decrease of commercial addition for sale goods Commercial Addition (Prices differences) = Goods for resale

Credit balance represents the total value of commercial addition for the goods for resale held by
company

ACCOUNTING TRANSACTIONS WITH INVENTORIES

Raw materials:
Purchase from suppliers:
301 Raw materials, A, +, D 401 Suppliers (accounts payable), E&L, +, C 301 Raw materials = 401 Suppliers

Consumption of raw materials in order to manufacture finished goods

601 Expenses related to raw materials, A, +, D 301 Raw materials, A, -, C 601 Expenses related to raw materials = 301 Raw materials

ACCOUNTING TRANSACTIONS WITH INVENTORIES

Consumables:
Purchase from suppliers:
302 Consumables, A, +, D 401 Suppliers (accounts payable), E&L, +, C 302 Consumables = 401 Suppliers

Consumption of raw materials in order to manufacture finished goods

602 Expenses related to consumables, A, +, D 302 Consumables, A, -, C 602 Expenses related to consumables = 302 Consumables

ACCOUNTING TRANSACTIONS WITH INVENTORIES

Finished goods:
Obtaining finished goods:
345 Finishing goods, A, +, D 711 Variation in inventory (potential revenues), E&L, +, C 345 Finishing goods = 711 Variation in inventory

Selling finished goods:

701 Sales of finished goods (Revenues), E&L, +, C 411 Costumers (Receivables), A, +, D 411 Costumers (Receivables) = 701 Sales of finished goods (Revenues)

Disposal (exit) of finished goods because of sale

345 Finishing goods, A, -, C 711 Variation in inventory (potential revenues), E&L, -, D 711 Variation in inventory = 345 Finishing goods

ACCOUNTING TRANSACTIONS WITH INVENTORIES

Goods for resale:

Purchasing goods for resale:
371 Goods for resale, A, +, D 401 Suppliers (accounts payable), E&L, +, C 371 Goods for resale = 401 Suppliers

Adding commercial addition in order to compose the final price for sale:
371 Goods for resale, A, +, D 378 Prices differences on goods purchased for resale (potential gain) , E&L, +, C 371 Goods for resale = 378 Prices differences on goods purchased for resale

Selling goods for resale:

707 Sales of goods purchased for resale (Revenues), E&L, +, C 411 Costumers (Receivables), A, +, D 411 Costumers (Receivables) = 707 Sales of goods for resale (Revenues)

ACCOUNTING TRANSACTIONS WITH INVENTORIES

Goods for resale:

Disposal (exit) of goods for resale because of sale
371 Goods for resale, A, -, C 607 Expenses related to goods for resale, A, +, D 378 Prices differences on goods purchased for resale (potential gain) , E&L, -, D % = 371 Goods for resale Price of sales 607 Expenses related to goods for resale Price of purchase 378 Prices differences on goods purchased for resale Commercial addition

ACCOUNTING TRANSACTIONS WITH INVENTORIES

ACCOUNTING TRANSACTIONS WITH INVENTORIES

ACCOUNTING TRANSACTIONS WITH INVENTORIES