Ordering and Accounting for Inventory

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1 Introduction

In this chapter we will look at the documents used within a business in relation to the goods, and also at the various methods of valuing the closing inventories.

2 Documents used within a business for the ordering, purchasing, receiving and issuing of goods.

Ordering goods

When a department requires new material, they will send a purchase requisition form to the purchasing department.

The purchasing department will then send a purchase order form to the relevant supplier (with copies to the accounts department and to the goods receiving department).

Receiving goods from the supplier

When the goods are received by the goods receiving departments, they will check the goods against the purchase order and against the delivery note (which the supplier will have prepared and sent with the goods and which will list what is in the delivery).

The goods receiving department will prepare a goods received note giving full details of the goods that have been received and will send copies to the purchasing department and to the accounting department.

The inventory records will be updated.

Receiving the invoice from the supplier

The purchasing department will match the invoice details with the purchase order and the goods receive note, and approve it for payment.

The approved invoice will be sent to the accounting department who will enter it into the ledgers and later pay it.

Issuing of inventory

When the production department requests materials for production, they will send a material requisition note to the stores.

The stores will issue the material and update the inventory records.

Any unused material will be returned to the stores together with a materials returned note and inventory records will be updated.

If material is transferred from one production department to another, a material transfer note is prepared.

When finished goods are despatched to customers, a goods despatch note and a delivery note are created.

3 The valuation of inventory

There are three methods used for the valuation of closing inventory in management accounting that you need to be aware of for the exam - FIFO, LIFO, and Weighted average.

FIFO - First In First Out

This method assumes that materials are issued out of inventory in the same order in which they were delivered into inventory. As a result, the closing inventory will consist of the most recent receipts.

LIFO - Last In First Out

This method assumes that materials are issued out of inventory in the reverse order to which they were delivered into inventory.

Cumulative weighted average cost

This method calculates the average cost after each issue of materials.