I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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However, there are three basic problems with this formula. 

(a) 

How do you manage to get a precise count of inventory in hand at any one time? 

(b) 

Even once it has been counted, how do you value the inventory? 

(c) 

Assuming the inventory is given a value, how does the double entry bookkeeping for inventory 

work? 

The purpose of this chapter is to answer all three of these questions. In order to make the content easier 

to follow, it is convenient to take the last one first. 

2.2 Ledger accounting for inventories 

The value of closing inventories is accounted for in the nominal ledger by debiting an inventory account 

and crediting the profit or loss account at the end of an accounting period. Inventory will therefore have 

a debit balance at the end of a period, and this balance will be shown in the statement of financial 

position as a current asset. 

It has already been shown that purchases are introduced to the statement of profit or loss by means of 

the double entry. 

DEBIT 

Profit or loss account 

$X 

 

CREDIT Purchases 

account 

 

$X 

But what about opening and closing inventories? How are their values accounted for in the double entry 

bookkeeping system? The answer is that an inventory account must be kept. This inventory account is 

only ever used at the end of an accounting period, when the business counts up and values the 

inventory in hand, in an inventory count. 

(a) 

When an inventory count is made, the business will have a value for its closing inventory, and the 

double entry is: 

DEBIT 

Inventory account (closing inventory value) 

$X 

 

CREDIT 

Profit or loss account 

 

$X 

However, rather than show the closing inventory as a 'plus' value in the profit or loss account (by 

adding it to sales), it is usual to show it as a 'minus' figure in arriving at cost of sales. This is 

illustrated in Section 2.1 above. The debit balance on an inventory account represents an asset, 

which will be shown as part of current assets in the statement of financial position. 

(b) 

Closing inventory at the end of one period becomes opening inventory at the start of the next 

period. The inventory account remains unchanged until the end of the next period, when the 

value of opening inventory is taken to the profit or loss account. 

DEBIT 

Profit or loss account 

$X 

 

CREDIT 

Inventory account (value of opening inventory) 

 

$X 

Partly as an example of how this ledger accounting for inventories works, and partly as revision on 

ledger accounting in general, try the following exercise.