Inventory

Inventory is a current asset account, which means it is something you have that can be turned into cash quickly. When you purchase inventory, you do so out of cash, so one side of the entry is credit cash - the other side, to increase inventory, is debit inventory. Basically, by listing an inventory item, you're just saying, I bought it this month, but I plan to keep it - or at least part of it - around, so the entire cost should not show up this month. The trick with inventory is knowing how to book it when you use it.

Some common inventory items are materials - which is simple. You have a value of raw material in inventory - which matches what you paid for it. (You cannot increase the value of your inventory as it sits in the yards, as prices go up. You make your gain when you use that cheaper material in a project where you're able to charge more for it than it cost you.) As you use your raw materials, you credit inventory, to reduce it, and debit the account, materials. Basically, think of it as buying the material from yourself, with no cash changing hands.

Another way that inventory might come up is when you buy $5,000 worth of brochures. Put that as a lump sum in your books for any given month, and you'll be a sad business owner, you'll think you're losing money hand over fist. So, try this: decide how long those brochures will last you, say three years. Divide $5,000 over 36 months, and you'll find that each month you need to book $138.89 (Call it $140 and be done with it).

What you're saying is that each month, you have to cover $140 as the cost of your brochures. It'll show up on your income statement as an actual cost. Each month the value of that inventory will decrease by that amount, until it's all gone. Theoretically your brochures will be gone about the same time - or outdated.

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Expenses Paid by Cheque : Expenses Paid By Cash : Accounts Payable : Cash Discounts on Purchases : Petty Cash : Payroll : Sales & Customer Deposits : Accounts Receivable : Inventory : Deposits : Sale of Assets : Depreciation : Suspense : Month End Adjustments : Paper Trails

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This page last modified: 11 Mar 2008