The basis of any commercial company is the purchase and sale of goods or services; hence the importance of inventory management by it. This accounting management will allow the company to maintain control in a timely manner, as well as to know at the end of the accounting period a reliable state of the economic situation of the company.
inventory-work-1Now, the inventory constitutes the items of current assets that are ready for sale, that is, all those merchandise that a company owns in the warehouse valued at the cost of acquisition, for sale or productive activities.
Through the following research work, some basic concepts of everything related to Inventories in a company, methods,.etc system will be disclosed.
Inventory
It is the set of goods owned by a company that have been acquired with the intention of selling them again in the same state in which they were purchased, or to be transformed into other types of goods and sold as such.
The companies dedicated to the purchase and sale of merchandise, as this is their main function and the one that will give rise to all the other operations, will need constant summarized and analyzed information on their inventories, which forces the opening of a series of main and auxiliary accounts related to these controls. Among these accounts we can name the following:
- Inventory (initial) Purchases Returns on purchase Purchases of purchases Sales Returns on sales Goods in transit Goods on consignment Inventory (final)
The Initial Inventory represents the value of merchandise stocks on the date the accounting period began. This account is opened when the inventory control, in the General Ledger, is carried out based on the speculative method, and does not return to movement until the end of the accounting period when it will be closed with a charge to cost of sales or for Profits and Losses. directly.
The Purchases account includes merchandise purchased during the accounting period in order to resell them for profit and that are part of the object for which the company was created. The purchase of Land, Machinery, Buildings, Equipment, Installations, etc. is not included in this account. This account has a debit balance, does not enter the balance sheet of the company, and is closed by Profits and Losses or Cost of Sales.
Returns in purchase, refers to the account that is created in order to reflect all those purchased merchandise that the company returns for any circumstance; Although this account will decrease the purchase of merchandise, it will not be credited to the purchase account.
Expenses caused by purchases of merchandise should be directed to the account entitled: Purchase Expenses. This account has a debit balance and does not enter the Balance Sheet.
Sales: This account will control all sales of merchandise made by the Company and that were purchased for this purpose. On the other hand we also have Returns for Sale, which is created to reflect the returns made by customers to the company.
On some occasions, especially if the company makes purchases abroad, we find that certain disbursements have been made or payment commitments (documents or money orders) have been made for merchandise that the company purchased but that, for reasons of distance or any other circumstance, They have not yet been received in the warehouse. To account for this type of operations, the account: Goods in Transit must be used.
On the other hand we have the account called Merchandise on Consignment, which is nothing more than the account that will reflect the merchandise that has been acquired by the company on "consignment", over which we do not have any property rights, therefore, the The company is not obliged to cancel them until they have been sold.
The Current (Final) Inventory is carried out at the end of the accounting period and corresponds to the physical inventory of the company's merchandise and its corresponding valuation. When relating this inventory to the initial one, with the net purchases and sales of the period the Gross Profits or Losses in Sales of that period will be obtained.
Inventory types
Periodic inventory: This inventory is generally used by small and medium-sized companies and has two characteristics:
- In order to know on a certain date what the inventory is, it is essential to make a physical count of it and then give it values.To control the cost of transactions that affect the inventory, different accounts are used according to the nature of the operation being carried out. doing.
The record of the transactions made, together with the taking of physical inventory and its corresponding valuation, will allow the preparation of the most important financial statement called the profit and loss statement.
The cost of the items sold and the inventory balance are only calculated at the end of the accounting period, when a physical inventory is taken.
Initial Inventory + Purchases- Final Inventory = cost of Art. Sold
Periodic inventory method: merchandise that is entered is registered in the purchase account with the aim of making a single adjustment entry to accumulate the cost of sale in a separate account.
There are basically two methods of determining inventory that can, at any given time, replace the physical counting method:
- Gross profit method: This method is based on the experience that the company has had in the previous period, in relation to the profit margin.
It is well known that the sale price of an item is made up of a part that represents the cost of buying or manufacturing that item, and another part that represents the gross profit that the entrepreneur wants to earn, that is:
sales price = cost of sale + profit
From the relationship it follows that:
cost of sale = sale price - profit
If, in addition to them, the accounting records allow us to determine the cost of the merchandise available, we can determine the cost of the inventory of merchandise that exists for that date, thus:
Merchandise inventory = available merchandise - cost of sale.
It can be seen that to obtain the amount of inventory by this method , the action is limited to determining the available merchandise and the cost of sale.
The gross profit method can be used not only to determine ending inventory, but also to calculate the balance of any account related to sales and cost of sales.
- Retail method: This other method that allows estimating inventory on any date and is used, basically, in those companies where retail or retail merchandise is sold, such as department stores. This company generally requires preparing financial statements at intermediate dates to closing for which, we know, it is essential to have the amount of inventories for those dates. It is obvious that taking physical inventory monthly in this type of business is such an arduous task that it is justified to use estimating methods, since if the calculation process is carried out carefully and systematically, the cost of the inventory thus determined would approach, reasonably, to the result that would be obtained by doing the physical inventory.
To apply this method of estimating inventories, a series of conditions are required. To achieve greater clarity in the explanation, we will base ourselves on the case developed in the illustration.
Sale price sale price
Initial inventory 30,600.00 43,100.00
Net purchases 98,200.00 140,900.00
Available merchandise 128,800.00 140,900.00
Less: sales (at sale price) 139,000.00
Current inventory (at sale price) 45,000.00
Cost-to-sale price ratio: 128,800.00 x 100 = 70%
184.00.00
Current inventory at cost price: 45,000.00 x 70 = 31,500.00
100
Continuous or Perpetual Inventory:
Incoming merchandise is registered to the Inventory account directly. In this inventory method, a record is kept in such a way that it shows at each moment what is the existence and the amount or value of the items in stock, that is, the charges or credits, or rather, the purchases and sales of Inventories are recorded as transactions or movements occur.
A continuous, current and daily record of inventory and costs of items sold is kept.
Seating:
- a) Purchases
Inventory XX
Accounts Payable XX
- b) Sale
Accounts receivable XX
Sales Income XX
Cost of sold items XX
Inventory XX
Among these we will mention only the most used:
- First Entry, First Exit (PEPS) methods:
Under the first-in, first-out method, the company must keep track of the cost of each unit purchased from inventory. The unit cost used to calculate the ending inventory may be different from the unit costs used to calculate the cost of the goods sold. Under PEPS, the first costs that enter the inventory are the first costs that go out to the cost of the merchandise sold, that is the reason for the name of First Entries, First Exits. The ending inventory is based on the costs of the most recent purchases. This inventory also called by the initials that identify it in English (first in first out) fifo.
Last Entry, First Exit (UEPS) methods:
The last entry, first exit method also depends on the costs of purchasing a particular inventory. Under this method, the last costs that go into inventory are the first costs that go out to the cost of goods sold. This method leaves the oldest costs (those of the initial inventory and the first purchases of the period) in the final inventory. The philosophy of this method is to first output the costs at which the last purchases were made. This brings as a consequence that the inventories that remain, will be valued at the costs of the first purchases.
The difference between the PEPS method and the UEPS is in the way of calculating the cost of the merchandise that leaves the warehouse.
Weighted average cost method:
Although rarely used, this is another method of inventory valuation.
To determine the weighted arithmetic average cost, proceed as follows:
- The units available in the period are added, that is, the initial balance plus those purchased, after deducting the returns. The respective costs are added. The total cost is divided by the total units if we base ourselves on the case. that we have been developing, would be as follows:
Date units cost
April 01 balance 100 2,000.00
April 02 purchase 300 7,500.00
April 06 purchase 200 6,000.00
April 10 purchase 100 3,300.00
April 15 freight - insurance 600.00
- 400.00
weighted average cost: 19,400.00 ¸ 700 = 27.7142.
After that, the final inventory is valued based on this cost, while the cost of sales is determined:
Cost of available merchandise 19,400.00
Less:
Final inventory: 240 units at Bs. 27.7142 each 8,651.40
Cost of sales 10,748.60
Simple averaging method: This method of costing inventory is also little used, however, let's sketch how it works.
It consists of determining an average unit cost calculated as follows:
- The unit costs of both the initial inventory and the different purchases made in a period are added together.The total thus obtained is divided by the number of items added together.
Unit cost date
April 01 20.00
April 02 27.00 (1)
April 06 30.00
April 10 33.00
110.00
- includes the cost of freight of Bs. 2.00 per unit registered on April 15.
Simple average cost: 11.00¸4 = 27.50
Then the final inventory cost and the corresponding cost of sales for the period are determined.
Cost of available merchandise: 19,400.00
Less:
Final inventory: 240 units at Bs. 27.50 each 6,000.00
Cost of sales 12,800.00
The weighted average and simple average methods have only been commented by way of illustration, because their non-use in practice means that they do not dedicate comments in the larger books.
Moving average method: This inventory control method has the following fundamental characteristics:
- each time a batch of merchandise enters the warehouse, the unit cost of the resulting balance must be recalculated. The physical existence is presented in a single total, instead of being segregated into batches according to the order of entry. units that are leaving, it is made based on the average cost calculated in the immediately previous balance.
Legal base:
Articles of the commercial code and the income tax law related to commercial accounting.
Article 32. - All merchants must keep their accounting in Spanish, which will include, necessarily, the Daily Book, the General Ledger and the Inventory Book.
Article 33. - The Daily Book and the Inventory Book cannot be put into use without having been previously presented to the Commercial Court or Registrar, in the places where there are, or to the ordinary Judge of the highest category in the town where those officials do not exist, to In order to put on the first page of each book a note that it has, dated and signed by the Judge and its Secretary or by the Commercial Registrar. The Office Seal will be stamped on all other sheets.
Article 34. - In the Daily Book, the operations made by the merchant will be recorded, day by day, so that each item clearly expresses who is the creditor and who is the debtor, in the negotiation to which it refers, or will be summarized monthly, by at least, the totals of those operations provided that, in this case, all the documents that allow verifying all the operations are kept, day by day.
Article 35. - Every merchant, at the beginning of his business and at the end of each year, will make in the inventory book an estimative description of all his goods, both movable and immovable, and of all his credits, assets and liabilities, linked or not to his trade.
The inventory must be closed with the balance and the profit and loss account; This must demonstrate with evidence and truth the benefits obtained, as well as any other obligations contracted under suspensive condition with the annotation of the respective counterpart.
The inventories will be signed by all those interested in establishing the business that are present in their formation.
Article 38. - The books kept in accordance with the preceding articles may be tested between merchants for acts of commerce. With respect to another person who is not a merchant, the entries in the books will only testify against their owner; but the other party cannot accept the favorable without also admitting the adverse that they contain.
conclusion
Accounting, it can be concluded that, since memorable times, man has insisted on keeping an exhaustive control of all the financial movements that are executed in his small, medium or large companies. Consequently, it has supported itself in various ways to achieve its end. Initially, it was carried out in very simple processes based on the approaches presented by the monk Fray Luca Paciolo, however over time, technological advance and business demands, accounting processes and techniques have evolved.
Currently it can be affirmed that the process of counting and recording financial data is developed in a simpler and simpler way with the support of the accountant, but it must be clarified that the established principles continue to be applied to execute business accounting.
Bibliography
- BRITO, JOSE A. Basic and intermediate accounting (Accounting I and II) Editions center of accountants 5th edition September 1999.Code of Commerce of Venezuela.Hangre, harrison and robinson, accounting, Hispano-American editorial ”www.monografias.com” Silva, J. (1990) Fundamentals of Accounting I Ediciones CO-BO.
ANNEXES
Example perpetual or continuous inventory:
A company that trades with Televisions, which buys the largest for Bs. 70,000 each and sells them retail for Bs. 80,000, would be:
Initial inventory - 4 units …………………………………..Bs. 280,000
Purchase in the period - 10 units ………………………. Bs. 700,000
Sell in the period - 9 units:
Sale price ……………………………………….. Bs. 720,000
Cost of units sold …………….. …………. Bs. 630,000
Final Inventory - 5 units ……. ……………………… Bs. 350,000
Initial Inventory: 280,000
| NEWSPAPER | PERPETUAL | ||||||
| REF | DESCRIPTION | SHOULD | TO HAVE | SHOULD | TO HAVE | ||
| to) | Purchases | 700,000 | |||||
| b) | Debts to pay | 700,000 | |||||
| to) | Inventory | 700,000 | |||||
| b) | Debts to pay | 700,000 | |||||
| to) | Accounts Receivable | 720,000 | |||||
| b) | Sales | 720,000 | |||||
| to) | Accounts Receivable | 720,000 | |||||
| b) | Sales | 720,000 | |||||
| c) | Sales cost | 630,000 | |||||
| d) | Inventory | 630,000 | |||||
In most cases the perpetual inventory method is used, a continuous record is kept, in quantities, for each of the different types of items held for sale. A simplified model can have the following presentation:
INVENTORY CARD
| Description: Televisions | ||||||
| ---- AMOUNTS ------ ------ VALUES ------– | ||||||
| Date | Bought | Sold | Existence | Fees | Credits | Balance |
| January 20, 1985 | 4 | 280,000 | ||||
| 10 | 14 | 700,000 | 980,000 | |||
| 9 | 5 | 630,000 | 350,000 |
Materials transformation process so that the inventory is formed.
Example:
- April 01: balance to date, 100 units at Bs. 20.00 each. April 02: 300 units were purchased at Bs. 25.00 each receipt note n ° 35 invoice accepted 60 days. April 03: 60 units were sold for Bs. 50.00 each, invoice 425 to 30 days. April 06: 200 units were purchased at Bs. 30.00 each, receipt note 42, 30-day invoice was accepted. April 07: 70 units were sold at Bs. 50.00 each, 460 to 90-day invoice. April 10: 100 units were purchased at Bs. 30.00 each, according to a 60-day invoice. In addition, a check was paid Bs. 200.00 for freight and Bs. 100 for insurance. Reception note n ° 61. April 15:A debit note was received from a supplier where he is charging 600.00 for freight of the merchandise that was purchased on April 2, which had been agreed upon when ordering. April 19: 10 units of those purchased on April 6 were returned. The corresponding amount was charged to the provider's account. Debit note 63. April 20: 40 units of those purchased on April 10 were returned to the supplier. The corresponding value will be charged to you.
- April 23: A customer returned 20 units of those sold on April 7. April 28: 300 units were sold at Bs. 70.00 each, invoice 510 to 60 days.
Made by:
Esneider Pantoja
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