Financial operations in companies and institutions differ according to the nature of their work, whether it is a commercial or service facility. There is also a difference in revenue generation between commercial and service facilities.
The various service establishments generate their revenues from providing various services to customers and consumers in exchange for wages and fees paid for these services, which we call revenue.
For example, accounting and legal consulting offices, translation and auditing offices, advertising companies, and others.
While establishments and commercial companies generate their revenues from buying or manufacturing goods and then reselling them to customers and consumers, for example, stores that sell groceries and various groceries, clothing stores, and other establishments that sell various goods.
In this new article on the "Program Idea" educational blog, we will explain the concept of commodity inventory and what is the accurate accounting treatment method for inventory.
What is commodity inventory?
Inventory is a business term that refers to the goods and materials that trading companies own and store in designated places called warehouses for the purpose of reselling them to the target audience.
The nature of inventory in commercial establishments differs from that in industrial establishments, of course. In commercial, inventory is a ready-to-sell commodity, while in an industrial one, inventory is raw materials, work-in-progress and ready-made goods.
During each financial period, the various commercial establishments carry out many purchases and sales of goods, and of course there will be a surplus of the goods that the establishment purchased that was not sold at the end of that financial period.
The inventory at the end of the period or the goods at the end of that period appears on the side of the assets under the item of current assets in the budget of the establishment.
What is the inventory counting process?
The inventory inventory process means that process in which we discover the quantity of goods or commodities remaining in the warehouses as well as their value at the end of each financial period, as companies at the end of each financial period appoint a committee responsible for inventory inventory and identify the quantity of goods remaining in the warehouses, through the counting process Or weigh or measure the goods, and then record this data or information in the inventory form.
For information, the committee that companies appoint for inventory inventory is made up of a person or a group of people. Here is a simple inventory template for a food store:
Merchandise inventory form
What is meant by inventory control?
Inventory is considered one of the most important resources owned by companies and various commercial establishments, and the value of inventory at the end of any financial period affects the business outcome of any commercial establishment, whether in terms of profit or loss, as well as the financial position of the establishment.
This requires commercial companies to use methods to control their inventory in warehouses, and perhaps the most prominent of these methods used in inventory control is to allocate the establishment for each item of the goods it has its own card called an item card.
So that the establishment records in this card the incoming and outgoing movements of this item based on the buying and selling operations and any returns that occur from the documents; To know the quantity and balance of each item at any given time.
Not only that, but compare it with what's in the stores.
In this way, some commercial establishments employ a person who is responsible for the goods in the warehouses, called a warehouse keeper or storekeeper.
The following is a sample of a sports shoe brand card for a shoe store:
Class card for sports shoes type...
How is the accounting treatment of commodity operations?
Commercial establishments generally use two basic systems when recording special operations on their goods, which are the periodic inventory system and the continuous inventory system.
Below is an explanation of each system separately...
Periodic inventory system
The periodic inventory system is called by this name; Because the inventory inventory process is only done once a year.
As commercial institutions and companies, according to this system, carry out an actual inventory of the goods in the warehouses at the end of each financial period they have; With the aim of knowing the quantity and cost of the remaining goods at the end of the period (the inventory at the end of the period that we talked about), as well as for the purpose of knowing the cost of sales, and then standing on the result of the business’s work in terms of profit or loss.
Depending on the periodic inventory system, the commercial establishment can extract the total income at the end of the financial period through some sequential steps as follows:
Stocktaking at the end of the period:
It means knowing the quantity of goods remaining in the warehouses at the end of the financial period of the company or commercial establishment.
Extracting the cost of inventory at the end of the period:
After the establishment carries out an inventory inventory at the end of the financial period (last-period goods), it then extracts the cost of the goods at the end of the period and records its value in the books. The inventory account is also closed at the beginning of the period (goods at the beginning of the period) by recording the following entries:
Proving the goods at the end of the period ⬇️
Recording the goods at the end of the period
Recording the closing of the goods account at the beginning of the period
Extract cost of goods sold:
The end-of-term goods account appears in the statement of financial position on the assets side, and it also appears in the income statement after it has been deducted from the goods available for sale. In order to determine the cost of goods sold (cost of sales) according to the periodic inventory system, as will be explained.
The cost of goods at the end of the period represents the cost of goods at the beginning of the period for the next financial period.
The cost of goods sold represents the cost of the goods that the company had at the beginning of the period, plus the cost of purchases made during the period, minus the cost of the goods at the end of the period.
The cost of sales is extracted