Inventory accounting involves tracking and recording the costs associated with inventory, from purchase to sale. Below are examples of common inventory-related journal entries, including purchasing inventory, recording cost of goods sold, and adjusting for inventory shrinkage.
1. Purchasing Inventory
When inventory is purchased, the cost of the inventory is recorded.
Example 1: A company purchases $15,000 worth of inventory on credit.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Inventory/Purchase | 15,000 | |
| 08-01-2024 | To Accounts Payable | 15,000 |
Explanation:
- Inventory/Purchase will debited to reflect the increase in assets.
- Accounts Payable will credited to record the obligation to pay the supplier.
2. Payment for Inventory
When payment is made for the inventory purchased on credit, the accounts payable is reduced.
Example 2: The company pays $15,000 to settle the accounts payable.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Accounts Payable | 15,000 | |
| 09-01-2024 | To Bank | 15,000 |
Explanation:
- Accounts Payable will debited to reduce the liability.
- Bank will credited to reflect the outflow of bank.
3. Recording Cost of Goods Sold (COGS)
When inventory is sold, the cost of the inventory sold is recognized as an expense.
Example 3: A company sells inventory that cost $10,000 for $20,000.
Journal Entry for COGS:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Cost of Goods Sold (COGS) | 10,000 | |
| 10-01-2024 | To Inventory/Purchase | 10,000 |
Journal Entry for Sales:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Accounts Receivable | 20,000 | |
| 10-01-2024 | To Sales Revenue | 20,000 |
Explanation:
- Cost of Goods Sold (COGS) will debited to reflect the expense associated with the sale of inventory.
- Inventory/Purchase will credited to reduce the asset.
- Accounts Receivable will debited to reflect the amount due from the customer.
- Sales Revenue will credited to recognize the revenue from the sale.
4. Inventory Write-Down
When the value of inventory decreases, such as due to obsolescence, an inventory write-down is recorded.
Example 4: The company writes down $2,000 worth of obsolete inventory.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Inventory Write-Down | 2,000 | |
| 11-01-2024 | To Inventory | 2,000 |
Explanation:
- Inventory Write-Down will debited to reflect the expense of reducing the inventory value.
- Inventory will credited to reduce the carrying value of the inventory.
5. Inventory Shrinkage
Inventory shrinkage refers to the loss of inventory due to theft, damage, or errors. It is recorded as an expense.
Example 5: The company identifies $500 worth of inventory shrinkage during a physical count.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-01-2024 | Inventory Shrinkage | 500 | |
| 12-01-2024 | To Inventory | 500 |
Explanation:
- Inventory Shrinkage will debited to recognize the loss.
- Inventory will credited to reduce the inventory balance.
6. Purchase Returns
If inventory purchased is returned to the supplier, the inventory account and corresponding accounts payable (or cash if it was paid) are adjusted.
Example 6: The company returns $1,000 worth of inventory to the supplier.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-15-2024 | Accounts Payable | 1,000 | |
| 12-15-2024 | To Inventory/Purchase Return | 1,000 |
Explanation:
- Accounts Payable will debited to reduce the liability owed to the supplier.
- Inventory/Purchase Return will credited to reflect the reduction in inventory.
These entries are essential for accurate financial reporting and ensuring that the cost of inventory and related transactions is properly accounted for in the financial statements.