Download Inventory Subsystem

2.4 Accounting Subsystems
Inventory Subsystem
Inventory Subsystem
Measurement of Inventory
Historical Cost assets are recorded at the amount of cash/cash equivalents
paid/payable at the time of their acquisition.
Current Cost -
assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same asset was acquired
currently.
Realisable Value -
assets are carried at the amount of cash or cash equivalents
that could currently be obtained by selling the asset in an
orderly disposal.
Inventory should be stated at the lower of historical cost or net realisable value.
To adjust the value of inventory:
Inventory revaluation loss
493.39
Inventory
493.39
(for revaluation of inventory to net realisable value below historical cost)
Calculation of cost
Specific Identification
First in First out (FIFO)
This is when each piece of inventory is able to be
identified separately. Cost of goods sold is the
actual cost of the item. This is only possible for
items with high values such as vehicles, furniture or
appliances.
It is assumed that the first inventory bought is the
first sold. Cost of goods sold is then taken as the
first cost.
Weighted Average Cost (WAC) It is assumed that items of inventory are completely
intermingled and so a new weighted average cost is
calculated after each item of purchase. This is then
applied to each sale. To calculate WAC:
Total Cost
Quantity
2.4 Accounting Subsystems
Inventory Subsystem
Inventory Subsidiary Ledger
Each piece of inventory has its own card.
It has - Name
Code
Supplier
Suppliers address
Optimum level of inventory
ALWAYS USE THE COST PRICE
FIFO
Date
Particulars
Aug 1 Balance
4 Purchases
Quantity
IN
Price Total
100
12 1200
6 Sales
Quantity
OUT
Price Total
200
50
11 2200
12 600
State
BALANCE
separately at
Quantity Price Total
separate
prices
200
11 2200
200
11 2200
100
12 1200
50
12
600
State separately if
they are separate.
Take first price first.
WAC
Date
Particulars
Aug 1 Balance
4 Purchases
6 Sales
Quantity
100
IN
Price Total
Quantity
OUT
Price Total
BALANCE
Price Total
200 11.00 2200
300 11.33 3400
200 11.33 2267
Quantity
12 1200
100 11.33 1133
Calculate
new WAC
Use WAC
For Purchases returns
FIFO – use the cost you bought it for
WAC – use the cost you bought it for
For Sales returns
FIFO – use the cost you sold it for
WAC – Use the new WAC
For shortages
FIFO – use the first cost price
WAC – Use WAC
For drawings
FIFO – use the first cost price
WAC – Use WAC
To work out gross profit
Add up total sales at sale price.
Minus COGS from the out column (as it’s the cost of the actual goods)
Ignore drawings, purchases returns and shortages (if it is not the end of the
year)
2.4 Accounting Subsystems
Inventory Subsystem
General journal entries
Purchases
Aug
9 Inventory
GST
Accounts Payable
cost
GST
cost & GST
Purchases returns
Aug
9 Accounts Payable
Inventory
GST
cost & GST
9 Accounts Receivable
Cost of goods sold
Sales
GST
Inventory
Price & GST
cost
cost
GST
Sales
Aug
Price
GST
cost
Sales returns
Aug
9 Inventory
Sales returns
GST
Accounts Receivable
Cost of goods sold
cost
price
GST
9 Drawings
Inventory
GST
cost & GST
price & GST
cost
Drawings
Aug
cost
GST
Inventory shortage
Aug
9 Inventory Shortage
cost
Inventory
(for shortage of x units upon stocktake)
cost
At the end of the year:
Aug
9 Cost of goods sold
total cost
Inventory shortage
(for transfer of inventory shortage)
total cost
The inventory account fluctuates up and down during the year and then is written off
at the end. This is because errors in the stock-takes may happen and in the next
month, they may re-appear again.
Inventory revalued/remeasured to net realisable value (below historical cost)
Aug
9 Inventory revaluation loss loss
Inventory
loss
(for revaluation of inventory to net realisable value
below historical cost)
2.4 Accounting Subsystems
Inventory Subsystem
Advantages of a periodic system
 Simple to operate – no complex record-keeping required during the
accounting period.
Disadvantages of a periodic system
 A stock-take is necessary whenever financial statements are required. The
cost of this is often high because a large number of people may be needed to
carry out the process after business hours. This means that financial
statements can not be prepared very often.
 No theoretical records of stock exist, so it is impossible to tell if stock has
been stolen, damaged or lost.
 Errors in stocktaking may not be detected; hence profit figures will be
incorrect.
 Accurate measuring of closing inventory can be difficult.
Advantages of a perpetual system
 There is continuous theoretical record of inventory on hand so that
stocktaking figures can be checked against this and any shortages or theft
identified.
 The cost of goods sold account is continually updated so that financial
statements can be prepared at any time without the need for a physical stocktake.
 The system is particularly suitable for computerisation and can provide
automatic re-ordering to maintain correct stock levels.
Disadvantages of a perpetual system
 The large amount of record keeping required makes this system unsuitable
for businesses which have a large quantity of small inventory items unless
they have computerised inventory systems.
Differences between the periodic and perpetual systems
Periodic
Perpetual
Relies on a stock-take for cost of goods
Stock-take is only done to confirm the
sold
level of inventory and to see if there is a
shortage.
Financial statements can’t be done on
Financial statements can be done on
demand.
demand.
Stock losses are un-noticeable
Stock losses are easily identified and
steps can be made to improve
procedures/security.
Uses purchases and purchases returns
Uses general journal
journal
Purchases and a Purchases returns
Straight into the inventory account
account
Disadvantages of too much inventory
 Wear and tear (obsolescence)
 Best before dates
 Shoplifting can occur more often
 Reduces cash flow
Advantages of a computerised system
 Programmed reorder pints for optimum levels of inventory so it can be
reordered at the correct time. No overstocking or running out of stock.
 Accounts are automatically updated when an invoice is sent out, no risk of
miscalculation and it saves time.
 Statements can be printed at the click of a button.