My lessons in inventory accounting are starting to pay off, and things
are starting to become clear. I'm curious about the method I've been using
to value my inventory, though.
I tend to buy my stock in lots. I may buy 10 units for $100, for
example. Later, I might buy 10 more for only $50. Even though I buy in
lots, the sale prices of the units are all over the map. Two different
units from the first group may go for $10 and $75, even though the average
cost was $10.
Thinking about inventory valuation, it makes sense to me to have a
perpetual system in place. For one thing, there is no accounts receivable.
Further, my customers pick the unique item out of my inventory that they
want. There is no FIFO or LIFO structure. I'm not really doing an average
When I make a sale, I would do the following...
1) Debit (increase) Cash by the amount of the sale
2) Credit (increase) Sales Revenue by the amount of the sale
3) Debit (increase) COGS expense by average cost of an item from the
item's purchase lot = $10.
4) Credit (decrease) Inventory Asset by same amount = $10.
Since each unit is unique, I know which lot each came from, and the
cost of each lot, this seems proper to do. It is not, of course, a
traditional Average Cost calculation, though. Since the units were bought
in lots, I don't have a truly Specific Identification calculation either.
Assuming the jumbled mess I just tossed out makes any sense, does it
seem as though this is a valid/allowable/legal/ethical way to manage these
I appreciate the help. I'm a software engineer by trade. I want to
do the right things, but this isn't my natural ballywick.
Thanks and Regards,