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Hi John,
what is the correct double entry for opening inventory, closing inventory and purchases?I didnt understand the meaning of ‘ cost of purchases’ and cost of coversion which costs are known as cost of purchases and cost of conversion.
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Opening inventory is brought forward from the previous period’s ledger account and charged to the income statement as follows.
DR income statement
CR Inventory
and for closing you do the opposite.
Conversion costs are those costs required to convert raw materials into finished goods that are ready for sale.Hi Archana
Nazim’s answer is correct.
You also asked for the correct entry for purchases – this is Dr Purchases; Cr Cash or Payables.
You might find my lecture on Inventory useful 🙂
Hello John:
Question 1 for chapter 9 testWhy couldn’t the answer be
Dr. Drawings 1920
Cr inventory 1920Thanks
Don’t forget that the inventory figure is what is counted at the very end of the year.
The owner is not going to wait until the inventory has been counted and then decide to take some 🙂He/she will take it during the year, and so whatever the business purchased, some of it went to the owner (so drawings) and only the rest were actually used by the business.
In kaplan book, the double entry for O.I is
dr opening inventory in COS
cr inventory assetsfor CI
dr inventory
cr closing inventory in cos
these double entries are quite confusing for me 🙁 🙁what is meant by inventory matching??
”excessive build up of certain lines of inventory whilst having insufficient inventory of other lines is avoided” .. This is one the merits of continuous inventory records. I did not get this point.
how periodic inventory records are cheaper than continuous inventory records?
Those entries are quite correct (but that is not what Carol had been asking about).
Have you watched the free lecture on Inventory? If you do, then it should make sense of the entries for you 🙂
If we are keeping a continuous daily record of inventories then we can continually check the levels of inventory and notice immediately if levels are getting too low or too high. If we are not keeping records then there is the danger of not realising there is a problem.
With regard to periodic records being cheaper – certainly before computers, this was the case because to record daily movements by hand took a lot of time and would need extra staff (and therefore extra cost). However, these days most companies use computers and any decent accounting software will automatically keep continuous inventory records and there is not the extra cost involved.
i am sorry you misunderstood my question. I was asking the double entries for OI and CI. I was not talking about Carol’s question. I was just wondering how those double entries regarding OI and CI are correct..
r opening inventory in COS
cr inventory assets…for CI
dr inventory
cr closing inventory in cosI will watch your video on inventory. 🙂
ajay’s annual inventory took place on 7 july 2006. the inventory value on this date was 38950. during the period from 30 june 2006 to 7 july 2006, the following took place.
sales 6500
purchases 4250
mark up on cost 25%
what is ajay’s inventory value at 30 june 2006.
sir, I only did not understand why we have to calculate margin on sales in this ques?what would be the effect on a company’s profit of discovering inventory with the cost of 1250 and a NRV of 1000 assuming that the same inventory had not been included in the original inventory count?
First question:
Inventory is valued at cost. We know the cost at 7 July and are working ‘backwards’ to find out what the cost was at 30 June.
There were sales of 6500, but these will be at selling price and so we need to calculate what the cost of these were for our ‘working backwards’.
Second question:
Inventory is valued at the lower of cost and NRV, so it should have been included at 1,000.
Including it will mean that the closing inventory is higher, and higher closing inventory results in higher profit.
sir, have still not understood 2nd one 🙁 2nd sentence is not clear to me.. if we include NRV value 1000 instead of 1250, closing inventory decreases isn’t it?
if there is closing inventory from many years back , assume 1996 but is sold this yr, should we need to include this in SOFP?
Your first question:
The question says that the inventory has not been included. If we include it then inventory increases!!!
Second question:
If it has been sold, then how can we include it in the SOFP? We are supposed to be showing the inventory that is left at the end of the year.
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