||Hello it's me Dave again. For
those of you that took my free So you want to learn Bookkeeping!
Introductory Tutorial or any of my other bookkeeping tutorials
we've already met. This tutorial assumes that you have a basic
understanding of some accounting terminology , debits and credits,
transaction analysis, and the general ledger and special journals.
If not please brush up and take my free So you want to learn
Bookkeeping! Introductory Tutorial.
A menu of all the lessons is presented at the top and bottom of all
the lessons. A back and next arrow also allow you to go back to the
prior lesson or on to the next lesson.
All lessons and examples in this tutorial are all based on the
accrual method of accounting, the double entry method of
bookkeeping, and the sole proprietor type of business
This Introduction provides
an overview of inventories and their importance, and the special
journals and records used to record and control this key
Lesson 1 Inventory Methods
discusses the periodic and perpetual methods for accounting for
merchandise inventory and how inventory transactions are recorded
using each method.
Lesson 2 Costing Methods
explains the different methods that are used to determine and
assign costs to inventory quantities on hand and sold.
Lesson 3 Estimating
Inventories discusses the methods used to estimate the value
(cost) of merchandise inventory when no physical count has been
taken or few detailed records are available.
Lesson 4 Lower Of Cost Or
Market explains why this special rule is used for valuing
inventory and how to apply it.
Lesson 5 Accounting for
Inventory discusses and reviews the accounts, subsidiary
ledgers, records, and special journals used to record inventory
transactions using the perpetual and periodic inventory
Lesson 6 What You Should
Know summarizes and reviews the methods, information, and
knowledge needed to adequately record and control one of a
wholesale or retail business's largest assets.
consists of goods purchased for the specific purpose of reselling
these goods to others. Vehicles are merchandise inventory for a
used car dealer; but, are assets classified as Vehicles &
Equipment for other businesses. Merchandise Inventory includes
only goods that are owned, on hand, and held for sale to
Wholesale and retail types of
businesses are examples of businesses that need to account for and
maintain records relating to the purchase and sale of these items.
Retailers sell products directly to the consumer while wholesalers
warehouse and sell large quantities of products to the retailers
who in turn sell it to us (consumer).
Their principal business activity
is the buying and selling of goods and many of their business
transactions relate to these buying and selling activities. Usually
the cost associated with maintaining an adequate merchandise
inventory represents a significant investment and often is
the largest current asset on the balance sheet. Likewise, the cost
of goods sold is normally the largest expense item in the income
A typical retail or wholesale
business buys inventory to resell and either pays at the time of
purchase or better yet is granted credit terms by a supplier(s) and
doesn't have to pay for 30 days or whatever terms were agreed upon.
Unfortunately, if you don't have it you can't sell it; however, it
takes time to sell your inventory and convert the goods into a sale
and ultimately back into cash. So, not only are good records needed
but also good inventory management procedures (rules) to aid your
business in having enough inventory but not too much. Think of your
inventory as an investment that gobbles up some of your cash that
won't be available to pay other obligations until the inventory is
sold and converted back into cash.
Due to the fact that merchandise
inventory is often one of your largest assets, it is imperative
that you set up a good record keeping system for monitoring and
maintaining this asset.
How do we value our inventory ?
Normally cost modified by a special rule is what our ending
inventory is valued at. Our cost should not only include the
direct cost of the product but theoretically should
include all of the applicable expenditures and charges directly or
indirectly incurred in bringing inventories to their existing
condition and location. Additional expenditures that should be
included in the cost of our inventory include transportation or
freight-in costs and purchasing, storage, and handling
In practice, due to the
difficulty and the cost involved in trying to assign purchasing,
handling, and storage cost to individual items these expenditures
are not normally allocated and assigned to our individual
products. Transportation (freight-in) costs should be allocated and
assigned to products. Many small business due to the hassle of
allocating transportation cost to products even exclude
transportation costs when not material.
Are there other types of
inventories ? Yes, but this tutorial is limited to the discussion
of Merchandise Inventory. I know you're curious so the other
types of inventories are used with businesses that manufacture
products or provide custom products to other businesses and
consumers. This area of accounting is called Cost Accounting and
just so you know, the other inventories used are Raw Materials,
Work-In-Process, and Finished Goods.
What are some special journals and
records usually used to keep up with the buying and selling
Since Special Journals were
discussed in my tutorial So,you want to learn Bookkeeping! -
Special Journals, only inventory related special journals and
records are covered in this tutorial. Although not absolutely
necessary, if you are not familiar with these journals or need a
quick refresher, I recommend that you take or review Bean Counter's
Special Journals tutorial.
||I really do hate to get you out
of your easy chair and kidnap you away from your television, but
it's time to put down your remote (I didn't say lose it), put on
your thinking cap, and learn about inventories.