Mastering Accounting For Inventory Part IV

Mastering Inventory is mastering its accounting. Inventories are assets, and COGS are related expenses. Manufacturing Inventory (different from Merchandising) requires splitting out Raw Materials, WIP, and Finished Goods. Perpetual and Periodic Inventory Systems adjusts for inventories and COGS continually, and the latter will adjust COGS at the end of period, respectively. Typically, accounting for purchases on account, sales, and then COGS will be:

1. Dr. Inventory, Cr. AP
2. Dr. AR, Cr. Sales Rev
3. Dr. COGS, Cr. Inventory.

Note that the formula for COGS = Beginning Inventory + Purchases + Freight – Returns/Discounts – Ending Inventory.

​Therefore, when accounting for these portions, you will:

1. Dr. Ending Inventory, Returns, and Discounts at the end of the period.
2. You will Cr. Beginning Inventory, Freight, and Purchases.

During the transaction periods, for both perpetual and periodic, you will:

1. Dr. Freight Expense, Cr. Cash
2. Dr. AP, Cr. Returns,
3. Dr. AP, while Cr. Purchase Discounts (using the gross method) and Cr. Cash.

Additionally, in inventory accounting, ways to identify costs are Specific ID, Average Cost, FIFO (First In, First Out), and LIFO (Last In, First Out).