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MikeLittle.
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gabbi08
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Dear Mike,
Could you please help on below?
The extract from the trial balance at 30 September 2011:
Inventory – 4 April 2011 20000
Cost of Sale 100000
Material Purchase 40000
Production labour 70000
Factory overhead 30000The inventory at 30 Sept 2011 was counted and value at cost of 40000
Required:
Show the extracts from I/S and SFP
Solution:
Opening inventory 20000
Material Purchase 40000
Production Labour 70000
Factory overhead 30000
Closing inventory (40000)Cost of sale 120000
Therefore
SFP
Inventory 20000+20000=40000I/S
Cost of sale 100000+200000=120000it is not clear the data entry for the above transactions.
If I increase the cost of sale the accounting entry would be
Dr Cost of sale
Cr?If I increase the Inventory the accounting entry would be
DR InventoryCr ?
In the example above I have debited both Cost of sale and Inventory and what about the credit?
Thanks and Regards
Gabriella
MikeLittle
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Cost of sales is not an account on its own – it’s a composite figure made up of three component elements (opening inventory, purchases and closing inventory)
Closing inventory is a strange figure – it isn’t part of the day-to-day routing double entries
For example, when a business buys inventory, the double entry involves a debit to the Purchases account – not to any Inventory Account
We used to say, when I was active as a lecturer, “Inventory is its own double entry”
An increase in Inventory in the Statement of Profit or Loss reduces Cost of Sales and therefore increases profits
That increase in shareholders’ funds is matched by a corresponding increase in the value of the Inventory on the Statement of Financial Position
OK?
gabbi08
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