This document discusses inventory systems in accounting. It describes the periodic and perpetual inventory systems that small and large organizations use respectively. Under the periodic system, inventory is determined at the end of an accounting period, while under the perpetual system inventory records are continuously updated. The document also outlines different inventory costing methods used under the perpetual system, including FIFO, LIFO, simple average, weighted average, simple moving average and weighted moving average. It emphasizes the importance of inventory in accounting as it helps ascertain profit and loss.

1. THE SYSTEM OF ACCOUNTING
Volume III
WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS
INVENTORIES

2. Inventory is the most important item on the subject of
accounting which indicates status of merchandise and in
manufacturing business and it says the actual position of
materials or stock held by the producer as finished goods
or unfinished goods or raw materials or we can inventory
is an asset kept by a business for the purpose of sale
includes raw materials, work in process and finished
goods.
The inventory does up and down profit as low inventory
low profit and high inventory high profit.
There are two main systems of inventory in accounting;
PERIODIC SYSTEM
Small organizations update their inventory records at the
end of an accounting period or when financial statements
are prepared which is called periodic inventory method.
Under this method, the revenue from sale is recorded
when sale is made and no credit entry is made in inventory
account or purchase account and at the end of the
accounting period, the inventory is determined by the cost
of goods sold statement as;
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Cost of merchandise in hand at the beginning of the periodxxxxxx
Add: Cost of merchandise purchased during the period xxxxxx
---------
Cost of merchandise available for sale during the period xxxxxx
Less: Cost of merchandise sold during the period. xxxxxx
----------
Cost of merchandise on hand at the end of the period xxxxxx
=====
PERPETUAL SYSTEM
Big organizations have to maintain up to date records of the cost and
quantity of each item of inventory in finished or unfinished forms and
maintain a subsidiary ledger of each item show increase or decrease in
material and the balances of the account.
The perpetual system requires method and method has many has many
kinds for calculation of inventories wherein some kind of methods in
perpetual systemare described;
Firstin first out (F.I.F.O) method
Under this method, the items bought first are used or sold first or in other
words, the item or material which was purchased or received first would be
used or issued first.
This method covers the cost price of material and the stocks remain near to
the recent market price. The closing stock of materials may be valued at the
cost of market price as shown in illustration 1;
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Last in first out (L.I.F.O) method
Under the LIFO method, the items bought last are used or sold
first which also means that the items still in stock are the oldest
ones.
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Averagecost
The average costmethod is based on mixing materials and the material
cannot be issued fromany particular lot of stock.
Averagecost method may be of four types;
- Simple average
- Weighted average
- Simple moving average
- Weighted moving average
Simple Average
In simple averagemethod, the price of every material is calculated by
dividing the purchased price of different materials as shown under;
500 units purchased at price Rs. 11/=
200 units purchased at price Rs. 12/=
300 units purchased at price Rs. 13/=
The simple averageprice will be calculated Rs.12 as calculated below:
11 + 12 + 13 = 36/3 = 12
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Weighted average
A price which is calculated by dividing the total cost of
materials in the stock from which the materials to be priced
could be drawn, the total quantity of materials in that stock
as;
1,000 x 15 + 2,000 x 17 + 3,000 x 19 = Rs.17.67
1,000 + 2,000 + 3,000
Simple moving average
Under the simple moving average inventory method, the
average cost of each inventory item in stock is re-calculated
after every inventory purchase under FIFO or LIFO methods.
The calculation is the total cost of the items purchased
divided by the number of items in stock. The cost of ending
inventory and the cost of goods sold are then set at this
average cost as shown in the table below:-
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Weighted Moving Average
The weight average method just work same as simple average method but it is
better to issue the materials at weighted average price method because it recovers
the cost price of the materials from production as shown in table below;
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10. INVENTORIES
The inventory plays an important role in accounting and
without it the concept of accounting is incomplete because it
helps in ascertaining the profit and loss.
The increase or decrease have an effect on profit or loss
and we can say that more stock more loss and less stock
more profit and this is the separate talk the stock is an asset
but the sale converts stock to profit and the profit covers
expenses which have already been consumed on achieving
the stock and the expenses are also the part of profit.
WRITER