Setting up an Inventory Asset Account

[Shocky]

On Friday 09 February 2007 21:10, Doug Laidlaw wrote:
> That is probably right, but where is the double entry for the cash?  You
> have one between Inventory and Expense, and one between Cash and ???
>
> Using COGS, you leave Inventory alone.  You have Purchases and Sales.  What
> you buy is debited to Purchases (Expense) What you sell is credited to
> Sales (Income)  At balance date, you do a stocktake (manual or continuous;
> that is a policy issue.)
>
> Then you create a Cost of Goods Sold account:
>
> Opening inventory as per Inventory account (transferred, zeroes it.)
> Add Purchases
> Less Sales
> Closing Inventory as per stocktake (creates your new balance in Inventory
> for your next accounting period.)
>
> What remains is Gross Profit or Loss, and is transferred to P&L
>
> That is what I learned as a lawyer, straight from the textbook.  You would
> have to ask an accountant how it is done in practice.
>
> Doug.
...

IANAA either, but that's my understanding as well. Inventory is an asset. It's 
not expensed until it's sold (or disposed of if it's expired, destroyed, or 
whatever). 

It's a lot more complex than this though. Unless you have a very trivial 
inventory (one type of goods always purchased at the same cost, including 
shipping), you're going to have to keep some auxiliary records. When you 
expense something sold, you have to assign a cost to it. This is a loaded 
cost, including for example the cost of shipping the inventory to you. And 
typically costs vary, so you have to decide on a costing policy: FIFO, LIFO 
or average (in most cases LIFO doesn't make sense, and may not be allowed by 
tax authorities). 

Short of talking to an accountant, you'd better pick up an accounting textbook 
with a good section on inventory management, and get familiar with it. 

Shocky
-- 
These are my opinions. Get your own.