Perpetual system: the Inventory account moves with every transaction — purchases increase it, and each sale reduces it and books cost of goods sold immediately. This is how modern accounting software works, and it is the default in this chapter's examples.

Periodic system: purchases accumulate in a "Purchases" account during the year; cost of goods sold is computed only at period end after the physical count: COGS = opening inventory + purchases − closing inventory.

Under the perpetual system, purchased goods enter the Inventory account at cost, against Cash/Bank (cash purchase) or Suppliers (credit purchase).

The company bought goods for 100,000 from a supplier on credit, then paid from the bank.

Inventory cost = purchase price + all costs of getting the goods to the warehouse: freight-in, customs duties, loading/unloading, and insurance during transit.

The company imported goods: price 200,000, customs 30,000, freight 10,000 — all paid from the bank.

When goods are returned to the supplier (damaged or off-spec), reverse the purchase: reduce Suppliers by the gross amount, take the goods out of Inventory at their carrying cost, and reverse their share of input VAT too — supported by the supplier's electronic credit/debit note.

Goods costing 15,000 + their VAT of 2,100, from a VAT-bearing credit purchase, were returned to the supplier.

A trade discount (off the price list) is never recorded — goods are booked at the net price directly. A settlement discount (for early payment) appears at payment: we pay less than the amount due, and the difference is discount earned.

A credit purchase of 50,000 with terms 2% discount if paid within 10 days — the company paid early: 49,000 paid, 1,000 earned.

Goods enter Inventory net of VAT; the deductible VAT goes to its own account (input VAT); the supplier is credited with the gross amount.

Credit purchase: net 100,000 + 14% VAT = 14,000, total 114,000.

Every sale has two sides: (1) the revenue at selling price, and (2) the goods leaving Inventory at cost into Cost of Goods Sold.

Goods sold for cash at 150,000 + 14% VAT (21,000) — the goods' cost is 90,000.

Under the periodic system the sale entry records revenue only (no cost entry per sale). At period end, after the physical count: COGS = opening inventory + purchases − closing inventory, closed in one entry.

Opening inventory 80,000, purchases 300,000, physical count at year end 60,000.

When a customer returns goods, reverse both sides: reduce revenue (Sales Returns account) with its VAT, and bring the goods back into Inventory at cost, reducing Cost of Goods Sold — provided they are resalable.

A customer returned goods sold on credit for 20,000 + VAT 2,800 — their cost is 12,000 and they are resalable.

The issue entry is always: DR Cost of Goods Sold / CR Inventory. The costing method never changes the entry — it changes the amount only.

The weighted average is computed and booked once at period end (it fits the periodic system) — the first issue cannot be priced with it on its own date because it depends on later purchases. Systems that price every transaction as it happens use the moving average.

Compare the physical count to the book balance. A shortage reduces Inventory and is charged to expense (inventory losses) — or to the responsible employee if accountability is established. An overage is almost always caused by an error (an unposted invoice or an over-recorded issue) — correct the source first; if no cause is found, close the overage as a reduction of the inventory-losses expense, not as earned income.

Book balance 500,000, physical count 480,000 → shortage of 20,000 with nobody accountable.

If the 20,000 shortage is proven to be the storekeeper's negligence and is charged to them:

The count revealed an overage of 5,000 (after ruling out recording errors):

Inventory is measured in the balance sheet at the lower of cost or net realizable value. NRV = expected selling price − costs to complete and sell. When NRV falls below cost, record the write-down as an expense (within cost of sales) against an inventory write-down allowance.

Slow-moving goods costing 300,000 with an estimated NRV of 260,000 → write-down of 40,000.

In a later period NRV recovered and a reversal of 25,000 is recorded (the reversal is capped at the previous write-down):

Shipped goods whose ownership has passed to us (FOB shipping point) but which have not yet arrived are recorded in Goods in Transit. On arrival, transfer to Inventory adding clearance and transport costs.

An import invoice of 150,000 for goods shipped before year end (FOB shipping point), not yet arrived. After arrival, customs and clearance of 20,000 were paid in cash.

Goods leaving inventory for anything other than a sale leave at cost: owner drawings go to the shareholders' current account, free samples to marketing expense.

The owner took goods costing 8,000 with a market value of 10,000 for personal use — output VAT is computed on the market value: 10,000 × 14% = 1,400:

Free samples costing 5,000 were distributed to customers:

A skilled accountant knows when not to record an entry. These cases are classic traps in exams and in practice:

1) Consignment goods we hold: goods owned by others that we hold to sell on their behalf — not our inventory, no entry (tracked in memorandum records only).

2) Our goods held by others (consignment out): still ours and stay in our inventory — no sale entry until the consignee actually sells them. (An internal reclass is allowed: DR Goods with Consignees / CR Inventory — a transfer within inventory itself.)

3) A signed purchase order where goods are neither received nor shipped: a mere contract — no entry until control of the goods passes.

4) Goods we sold FOB destination still in transit: still our inventory — no sale is recognized until delivery. (An internal reclass only is allowed: DR Goods Shipped to Customers / CR Inventory — a transfer within inventory itself, with no sale recognized.)

Cost flows with the goods: raw materials → work in process (+ direct labor + manufacturing overheads) → finished goods → cost of goods sold at sale.

Raw materials of 50,000 were issued to production; direct labor 30,000 and overheads 20,000 were added; all production was completed and later sold.