Accounting for Inventory

Hi All,
    I'm trying to understand the very basics of accounting for inventory. I've been reading a good bit online, but I'm not making sense of what I want
to know.
    I have a small business where I purchase used items and resell them at a profit. All the items are unique, and are purchased for and sold for unique values.
    I understand that my current inventory is a business asset. What I don't understand is the "accounts" I use when I buy a new item and want to add it to that asset, or when I sell an item, and need to remove it. The purchase price is an expense to the business, but is generally way less than the value of the item in inventory (it's sale price). How do these things balance? Do I have to have some sort of "Value Added" account to balance this difference? What does it balance against?
    I know myself well enough that I'm probably making this a lot harder than it really is, but I'm not getting it. Can anyone help me understand this?
Thanks and Regards, Max
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

There's your problem right there. Inventory is always carried at your cost. If you like, and want to create footnotes, you can disclose the value of the inventory you hold there. That type of entry isn't appropriate in a set of financial statements designed to report your revenues, expenses, assets, liabilities and equity.

Inventory is reported at your cost. Any off-setting entry would be to cash if purchased by cash or check, to A/P if purchased on credit, or maybe to a credit card if purchased in that manner. But it is always - always - recorded at what your cost was, is, or will be.
The item is removed from inventory - AT COST - when sold which results in a thing called Gross Profit, which is sales price less your cost in the inventory. From Gross Profit you subtract your operating and other business expenses like rent, advertising, utilities, salaries, supplies, etc and so on.
--
Paul A. Thomas, CPA
Watkinsville, Georgia
  Click to see the full signature.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

That is a big difference! The rest of what you said makes sense as well. Thank you for the help!
Regards, Max
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
Max,
I suggest going to this page:
http://www.a-systems.net/training_vb.htm
Click on the last selection under Special Features: Crash Course in Accounting.
I have found this free course to be simple and easy to follow if you want to understand the basics in accounting.
Good luck,
AJ

Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

I will AJ. Thanks for the pointer.
Regards, Max
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload
On 12 Sep 2008 19:12:06 GMT, Max Moor wrote:

First, since your inventory items are unique and you are running a small business, you should be using a perpetual inventory system. This allows you to determine the quantity and cost of the inventory that should be on hand at any time.
Try to approach accounting from two sides:
Your inventory account would be debited (increased) when you purchase an item for your business. The debit would be recorded at cost. At the same time, your cash or a/p account (if you buy on credit) would be credited for the same amount.
When you sell an inventory item, two sets of entries must be made. Cash (or accounts receivable if on account) must be debited and sales revenue must be credited for the sale price. You also have to make entries for the loss of inventory: you need to remove (credit) that item from the inventory account at cost, at the same time, you debit the cost of goods sold for the same amount. The COGS account allows you to see the amount of inventory sold. What is left in value is determined by subtracting it from beginning inventory + purchased inventory.
The difference between the cost of the inventory item and its sale price (gross profit) is not recorded, but you could calculate it by subtracting the transaction COGS from the transaction sales revenue. You could do the same to determine the gross profit on all your sold items. Finally, Gross Profit - Operating Expenses = Net Income (or Loss).
--
Deja Vu: The feeling that somehow, somewhere, you've been kicked in the
head like this before.
  Click to see the full signature.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

Hi Rocinante,
    Thanks for the explanation. That was exactly what I was trying to understand. I found a website last night that gave me a good graphic version of what you said:
http://accountinginfo.com/study/je/je-101.htm
    Their example #5 has a glaring error in the numbers, but the illustration was good for me.
    Thanks again.
Regards, Max
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

BeanSmart.com is a site by and for consumers of financial services and advice. We are not affiliated with any of the banks, financial services or software manufacturers discussed here. All logos and trade names are the property of their respective owners.

Tax and financial advice you come across on this site is freely given by your peers and professionals on their own time and out of the kindness of their hearts. We can guarantee neither accuracy of such advice nor its applicability for your situation. Simply put, you are fully responsible for the results of using information from this site in real life situations.