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I am having trouble understanding some of the risks associated with inventory and goods in transit.
My query is: Should I record inventory when I pay for the goods, when I receive the goods, or when the supplier has dispatched them?Also, what should I know broadly about the correct treatment of goods in transit to be able to pass this exam?
Much appreciated!
As in FA, we do not record inventory movements in the double-entry bookkeeping system. During the year we record purchases (Dr Purchases/Cr Cash/Trade payables) and sales (Dr Cash/Trade receivables/Cr Revenue).
At the reporting date we ascertain the value of inventory by whatever means (full physical count or relying on perpetual inventory records) and make a period-end adjustment using a journal entry (Dr Inventory (SoFP asset)/Cr Inventory (SOPL)).
Goods-in-transit from a supplier are a timing difference that you would expect to find on a supplier statement reconciliation (see page 94 in the trade payables Chapter 18 of our AA notes).
They are also relevant to the assertion of cut-off (see s.5 in inventory Chapter 20 for purchases cut-off).
Please ask further if you still have a question about this.
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