Accounting for Inventory

"Max Moor" wrote

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 Thomas, CPA" wrote in news:Rrzyk.28831$ snipped-for-privacy@bignews3.bellsouth.net:

That is a big difference! The rest of what you said makes sense as well. Thank you for the help!

Regards, Max

"A Nonny Moose" wrote in news:48cacea4$0$33226$ snipped-for-privacy@news.qwest.net:

I will AJ. Thanks for the pointer.

Regards, Max

Max,

I suggest going to this page:

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

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).

Rocinante wrote in news:11mrzgf0yqgkl $. snipped-for-privacy@40tude.net:

Hi Roc

Their example #5 has a glaring error in the numbers, but the illustration was good for me.

Thanks again.

Regards, Max