What You Need to Know About Inventory Transactions
If your company is manufacturing products instead of providing services, you will need to maintain accounting records for your inventory transactions. Some businesses purchase finished goods at wholesale prices and resell them at retail. While other businesses manufacture products.
Double Entry Accounting
Double entry accounting is the process of recording transactions twice when they occur. A debit entry is made in one account and a credit entry in another account. A chart of accounts can help you determine which entry you should make.
Inventory Cycle
The company’s inventory cycle consists of three stages: the ordering stage (or management), production stage, and finished goods and delivery stage. The ordering stage is the duration it takes to order and receive raw materials.
Transaction Overview
During the manufacturing process, after inventory leaves the raw materials stage, it is transferred to work in progress inventory and recorded in the corresponding account by the company’s accountant (the second entry in the table below).
Accounting
The ledger is a detailed record of the company’s financial transactions. Transactions are listed in chronological order, by amount, the affected accounts, and the direction of those accounts.
Inventory Accounting
If you purchased $100 of raw materials to manufacture your product, you would record the $100 in the raw materials inventory account and record $100 in the accounts payable account. When the $100 of raw materials is moved to work in progress stage, you would record $100 in the work in progress inventory account and $100 in the raw materials account.
Transaction on Sale
When the product is ready for sale, it is transferred from finished goods inventory to be sold as a product. The inventory amount is recorded in finished goods and the cost of goods sold amount is recorded. The goods are transferred from inventory to expenses.
Cost of Goods Sold Ledger and Cash Ledger
When you sell the product for $100 cash, you will record a cash entry in the accounting ledger and record the sales amount in the sales revenue account. This transaction shifts the amount from expenses to revenues, completing the inventory accounting process for the item.
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Source: https://www.thebalancemoney.com/example-of-a-bookkeeping-entry-for-inventory-transactions-392923
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