Inventory by gyvwpsjkko

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									                  Inventory
•   Is an ASSET
•   Which a business buys
•   To RESELL
•   During the normal everyday activity of the
    business
          Inventory (cont’d)
• Else known as STOCK
• Stocktaking
•    is when a business counts the stock
     (inventory) that it owns
           Record in the GL
• When it meets the definition of an asset
• & when the recognition criteria are met
          Consignment Stock
• Stock that a business gives to an AGENT to sell
  on its behalf
• The business remains the owner of the stock
• The agent ONLY SELLS the stock, the service for
  which the agent will receive COMMISSION (%
  of selling price)
• INCLUDED in inventory because the business has
  the risks & rewards of ownership
                   Example
• Gave an agent 10 leather bags costing R200 each
  to sell for R350 per bag on 1/7/19x1
• Agent would be paid 10% commission
• Agent sold the bags on 31/7/19x1 &
• 1) Paid the cash to the business on the date
      of sale
• 2) money to be paid to the business on 30
      November 19x1

• Prepare the journal entries
               Solution
• 31/7/19x1
• Dr Bank                  3 150
•    Commission              350
•          Cr. Sales                3 500
• Sold 10 bags for R350 each & paid
  commission of 10%
            Solution (cont’d)
• 31/7/19x1
• Dr. Accounts receivable           3 150
•     Commission                      350
•           Cr. Sales                     3 500
• Sold 10 bags for R350 each & paid commission of
  10%

• 30/11/19x1
• Dr. Bank                           3 150
•          Cr. Accounts receivable         3 150
• Monies received for 31/7/19x1 sale
        2 methods of shipping
• Free on board (“FOB”)
• Carriage, insurance & freight (“CIF”)

• FOB
• Supplier is free of the risks & rewards of
  ownership from when the inventory is loaded onto
  the ship
• The buyer has the risks of ownership once the
  inventory is loaded
                    CIF
• The supplier has ownership until the goods
  have arrived on shore or at its destination
• The buyer gets ownership once the goods
  have arrived on shore or at its destination
                Example
• Ordered 25 bags from Italy on 1/7 19x1
• The bags were loaded onto the ship on
  1/7/19x1
• On 31/7/19x1 the bags has not reached
  Cape Town harbour yet

• How do we record the inventory on
  31/7/19x1 if we bought it 1) FOB 2) CIF
                 Solution
• FOB
•   the business must include the 25 bags
    with inventory

• CIF
•    the business don’t record anything
2 methods of recording inventory
             in GL
• Periodic method
• Perpetual method
             Periodic method
• A system that only calculates the inventory
  balance at the end of the accounting period
• Record the purchase of inventory and purchases
  returns during the accounting period in the
  PURCHASES a/c
• the expense for inventory sold (COS) is calculated
  & recognised in the I/S
• Physically count stock to calculate the stock on
  hand
    Periodic method (“cont’d”)
• Transfer opening inventory to the COS a/c
• Transfer the purchases amount to COS a/s
• Record the closing inventory by
•    Dr. Inventory
•          Cr. Cost of Sales a/c
       Cost of Sales ledger a/c
• Dr      Cost of Sales Account     Cr
• Opening inventory Closing inventory
• Purchases



• The balance reflects the cost of inventory
  that has been sold
           Perpetual method
• Is a recording system that that keeps track
  of the inventory on hand at any time
• Records the inventory purchased during the
  accounting period in the INVENTORY
  ASSET a/c (increase)
• Every time inventory is sold or returned to
  the supplier, the inventory a/c is decreased
   Perpetual method (“cont’d”)
• USED inventory     record as an expense
                     (COS)

• UNUSED inventory   record as an asset
•               (INVENTORY on hand)
    Perpetual method (“cont’d)
• In theory, the balance of the ledger a/c for
  inventory at any time should be equal to the
  inventory that is available to be sold
• Record ALL purchases, sales & returns to
  the INVENTORY ASSET a/c
• When we sell goods during the period we
  transfer the COST of goods sold out of the
  inventory a/c to the COS expense a/c
• COS a/c reflects the correct (actual) cost of
  all the inventory sold to date
     Recording the purchase of
            inventory
• Bought 100 handbags at R200 each

• Periodic system
• Dr. Purchases                      20 000
•      Cr. Bank/ Accounts Payable             20 000

• At end of accounting period, assume no inventory
  was returned
• Dr. Cost of Sales (expense)        20 000
•     Cr. Purchases                        20 000
    Recording the purchase of
      inventory (“cont’d”)
• Perpetual system
• Dr.Inventory (asset)         20 000
•    Cr. Bank / Accounts Payable    20 000
   Recording purchases returns
• Else known as RETURNS OUTWARDS
• Example
• 10 bags were defective & returned to the
  supplier
• Record the journal entries for 1) cash refund
  2) credit purchase 3) supplier replacing bag
             Example (cont’d)
•   Periodic system
•   1) Cash refund
•   Cash to be paid later
•   Dr. Accounts receivable     2 000
•       Cr. Purchases                   2 000

• Dr. Bank                      2 000
•     Cr. Accounts receivable           2 000
           Example (cont’d)
• 2) Credit purchase
• Dr. Accounts payable         2 000
•    Cr. Purchases                  2 000

• 3) Supplier replacing bags
• No entry
          Example (cont’d)
• Perpetual system
• 1) Cash refund
• Dr.Accounts receivable       2 000
•    Cr. Inventory                  2 000

• Dr.Bank                      2 000
•    Cr. Accounts receivable        2 000
           Example (cont’d)
• 2) Credit purchase
• Dr.Accounts payable     2 000
•    Cr. Inventory             2 000

• 3) Supplier replacing
• No journal entry
          Sale of inventory
• Example
• Sold 20 bags for R350 each

• Periodic method
• Dr. Bank / Accounts receivable 7 000
•          Cr. Sales                  7 000
          Example (cont’d)
• Perpetual system
• Cost price = 20*R200 = R4 000
• Dr.Cost of Sales (expense)   4 000
•    Cr. Inventory (asset)          4 000

• Dr. Bank / Accounts receivable 7 000
•    Cr. Sales                        7 000
                 Example
•   Owner took 1 bag for personal use
•   Perpetual
•   Dr. Drawings                  200
•      Cr. Inventory                  200
•   Periodic
•   Dr.Drawings                   200
•      Cr. Purchases                  200
                Example
• Sold 20 bags for R350 each in exchange for
  a computer
• Perpetual
• Dr. Cost of sales              4 000
•     Cr. Inventory (asset)            4 000
• Dr.Computer                    7 000
•     Cr.Sales                         7 000
          Example (cont’d)
• Periodic
• Dr.Computer           7 000
•    Cr. Sales               7 000
               Sales return
• Else known as “return inwards
• Example
• 1 bag was damaged & returned by the
  customer.

• Prepare the j/es assuming initial entry was a
  1) cash sale 2) credit sale 3) replaced bag
           Example (cont’d)
• Periodic system
• 1) & 2
• Dr.Sales                     350
•    Cr. Bank/ Accounts receivable 350

• 3) Damaged bag
• Replacing it, therefore no entry
          Example (cont’d)
• Perpetual system
• 1) & 2)
• Dr.Inventory               200
•    Cr. Cost of Sales             200

• Dr.Sales                     350
•    Cr. Bank/ Accounts receivable 350
          Example (cont’d)
• 3) Replace bag
• Dr.Cost of Sales      200
•    Cr. Inventory            200
                    Exercise
• 1) Post the journal entries to the ledger a/c
• 2) Prepare a pre-adjustment trial balance
• 3) Inventory count at end of financial period   :
  R10 000
• 4) Do the adjusting journal entries
• 5) Prepare the post-adjustment trial balance
• 6) Do the closing entries
• 7) What element is the purchases a/c?
           Cost of inventory
• = Cost of purchasing the inventory
• + any other cost incurred to bring the
  inventory to a place & condition where it
  can be sold
•    e.g transport cost in bringing the
  inventory to the store/business
•    e.g import tax
                 Example
• Bought 50 bags at R200 each
• Paid in cash, for transport costs at R60 per
  bag
• Paid in cash import duties of R20 per bag

• Prepare the j/es to record the purchase of
  the bags from Lesotho
          Example (cont’d)
• Periodic system
• Dr.Purchases         10 000
•    Cr. Bank                   10 000

• Dr.Transport costs   3 000
•    Cr. Bank                   3 000

• Dr.Import duties     1 000
•    Cr. Bank                   1 000
           Example (cont’d)
• At the end of the accounting period:
• Dr. Cost of Sales         14 000
•     Cr. Purchases                    10 000
•     Cr. Transport costs               3 000
•     Cr. Import duties                 1 000

• Note: cost incurred in selling the inventory
  are NOT INCLUDED
            Example (cont’d)
• Perpetual system
• Dr. Inventory        10 000
•     Cr. Bank                  10 000

• Dr. Inventory         3 000
•     Cr. Bank                   3 000

• Dr. Inventory         1 000
•     Cr. Bank                   1 000
                   VAT
• Do you think COS & inventory should
  include VAT

• If a VAT vendor – no, as VAT will either
  be claimed or paid over to SARS

• If not a VAT vendor – cannot claim VAT
  input & the amount paid for VAT would be
  included in the cost

								
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