Accounting for Inventory

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

Debit	Income Statement
Credit	Inventory

Closing inventory at the period end is recorded as follows:

Debit	Inventory
Credit	Income Statement

The Inventory Ledger Account therefore would appear as follows:

Inventory Account
Debit	$	Credit	$
Balance b/f	100	Income Statement	100
Income Statement	200	Balance c/d	200
	300		300

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.

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AVCO Method

Accounting for Fixed Assets