Recording Inventory on the Balance Sheet

by David Bazile
(Manhattan )

Hi Kate,

Hope all is going well for you. I am back with another question which is giving me a challenge. In the business where I work, there is inventory kept in storage and also inventory in the back room of the shop. When you have to record inventory on the balance sheet, what are the steps to take to do that accurately?
I'm aware of the two accounting methods which are related to inventory. But even being aware of those methods, I'm still having a bit of a challenge recording inventory.
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Hi David!

When you have inventory in storage, but you may not have the receipts to show you what it was purchased for, you need to estimate what the cost was when purchased, or assign a fair market value to the items.

How to do that?

What would you have to pay for it today? That's one way to assign a fair market value. Or you could try digging thru old paperwork to find the receipts. Easiest way? Price the item today, and assign that cost to each item you have stored.

If these items are not on the Balance Sheet yet, you need to make an entry to put them on the books.

Debit Inventory of course. What's the credit? You could credit Owners Equity, under the assumption that the owner purchased the items originally.

Hope that helps David.

Let me know if you need anything else.

Take Care!
Kathleen

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Oct 30, 2013
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by: David Bazile

Good Afternoon Kate,

Thank you again for your timely response to my question. You have taken a complex concept and have explained it in a way in which I can understand. I am very grateful for your efforts.

Also, what's interesting is that I have learned the same concept in class, but I kept saying that situation is only for a manufacturing company.

Warmest Regards,

David Bazile

Oct 28, 2013
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by: Anonymous

David,

First of all, I love the fact that you are thinking like an accountant already!

So you have finished garments in the back room, that haven't sold.

Let's walk thru the process once. Your employer buys materials, and sews a garment together to sell.

Inventory is really a 3-step process itself. You have Raw Materials Inventory, then Work-in-Process Inventory, then Finished Goods Inventory.

For your employer, the fabric and trims would be Raw Materials, a garment while being sewed would be Work-in-Process, and a completed garment would be Finished Goods.

At any point in time, your business will have some items in each stage of Inventory. Estimate the cost of the garment, and list it in Inventory too. If you are making a large list of what's in your Inventory (which you should be) then list each garment with an applicable 'cost' figure.

If garments don't sell, are they put 'on sale'? Then what? trashed? given away?

You would make an entry for Inventory that has been thrown out or given away...

If the dollar value is small, most companies would just Credit your Inventory account and Debit your Purchases (Cost of Goods Sold) account, thereby reversing it off the books.

If the dollar value is significant, I would Debit a Cost of Goods Sold account, which would have a name like 'Obsolete Inventory', and Credit the Inventory account. By making an entry like this, you keep your Income Statement more accurate, especially if the garments were made in a previous accounting period.

As much as possible, you want to MATCH your revenue and expenses, and report them in the same accounting period.

Does that help?

Kathleen


Oct 27, 2013
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Response to Recent Post
by: David Bazile

Good evening Kate,
Thank you for your detailed response. Adding a fair market value sounds more logical and doesn't risk overstating the value of inventory. You explained that i would need to debit inventory and credit owner's equity. But when i think about it, there is another step i'm missing.The inventory in the back room and storage is garments which did not sale. These garments were made from materials puchased like fabrics. How do you report inventory under this situation?

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