Accounting for Inventory


Opening inventory is brought forward from the previous period's ledger account and charged to the income statement as follows:

DebitIncome Statement
CreditInventory

Closing inventory at the period end is recorded as follows:

DebitInventory
CreditIncome Statement

The Inventory Ledger Account therefore would appear as follows:

Inventory Account
Debit$Credit$
Balance b/f100Income Statement3100
Income Statement2200Balance c/d4200
300300

The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:

Opening Inventory$100
Add: Purchases$500
Less: Closing Inventory($200)
Cost of Goods Sold$400

Note that the cost of goods sold is not simply the cost of purchases during the period. This is the application of the Matching Concept which requires expenses to be recognized against periods from which associated revenue from the expense is expected to be earned. Therefore, as closing inventory is not consumed at any given accounting period end, it must not be part of expense which is why it is deducted from the cost of sale. Similarly, as opening inventory is consumed in the current accounting period, it must therefore be added to the cost of goods sold.