Mastering Accounting For Inventory Part III

Mastering Inventory is mastering its accounting. Inventories are assets, and COGS are the related expenses. Merchandising Inventory and Manufacturing Inventory differentiate, and Manufacturing Inventory involves (Raw Materials + Direct Labor + Manufacturing Overhead), Work-In-Process, and Finished Goods.

Perpetual inventory continually adjusts inventories and COGS. Typically, the account for purchases on account will be: Dr. Inventory, Cr. AP. Then for sales, it will be Dr. AR, Cr. Sales Revenue. Then, Dr. COGS, Cr. Inv.

Periodic Inventory systems records COGS at the end of each reporting period, determined formulaically by:
COGS = Beginning Inventory + Net Purchases – Ending Inventory.

Another way of saying this is expanding Net Purchase, where the formula effectively, will be:
COGS = Beginning Inventory + Purchases + Freight – Returns – Ending Inventory.

Therefore, you will first Dr. Inventory, Cr. AP for account purchases.

Then for sales, you will Dr. AR, and Cr. Sales Revenue.

​Upon recognizing COGS, you will typically Dr. COGS, and break out the COGS by Dr. Ending Inventory and Returns, while Cr. Beginning Inventory, Purchases, and Freight.