Chapter 3. Inventory

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Slide 3.1
Chapter 3
Inventory
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.2
Learning objectives
After you have studied this chapter, you
should be able to:
 Explain why it is inappropriate to use an
inventory account to record increases and
decreases in inventory
 Describe the two causes of inventory
increasing
 Describe the two causes of inventory
decreasing
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.3
Learning objectives (Continued)
 Explain
the difference between a purchase
account and a return inwards account
 Explain the difference between a sales
account and a return outwards account
 Explain how to record increases and
decreases of inventory in the appropriate
accounts
 Explain the meanings of the terms
‘purchases’ and ‘sales’ as used in
accounting
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.4
Learning objectives (Continued)
 Explain
the differences in recording
purchases on credit as compared to
recording purchases that are paid for
immediately in cash
 Explain the differences in recording sales
on credit as compared to recording sales
that are paid for immediately in cash
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.5
Inventory
Normally, goods and services are sold
above
cost price, the difference being profit. As
you know, when goods and services are
sold for less than their cost, the difference
is a loss.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.6
An increase in inventory
An increase in inventory can be due to one
of two causes:
 The
purchase of additional goods.
 The return in to the business of goods
previously sold.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.7
An increase in inventory (Continued)
To distinguish the two aspects of the
increase of inventory, two accounts are
opened:
A
purchases account, in which purchases
of goods are entered.
 A return inwards account, in which goods
being returned into the business are
entered.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.8
A decrease in inventory
A decrease in inventory can be due to one
of two causes:
 The
sale of goods.
 Goods previously bought by the business
now being returned to the supplier.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.9
A decrease in inventory (Continued)
To distinguish the two aspects of the
decrease of inventory, two accounts are
opened:
A
sales account, in which sales of goods
are entered.
 A return outwards account, in which goods
being returned out to a supplier are
entered.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.10
Activity
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.11
Purchase of inventory on credit
On 1 August 2012, goods costing £165
are bought on credit from D. Henry.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.12
Purchase of inventory for cash
On 2 August 2012, goods costing £310 are
bought, cash being paid for them
immediately at the time of purchase.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.13
Sales of inventory on credit
On 3 August 2012, goods were sold on
credit for £375 to J. Lee.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.14
Sales of inventory for cash
On 4 August 2012, goods are sold for £55,
cash being received immediately at the
time of sale.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.15
Returns inwards
On 5 August 2012, goods which had been
previously sold to F. Lower for £29 are
now returned to the business.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.16
Returns outwards
On 6 August 2012, goods previously bought
for £96 are returned by the business to
K. Howe.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.17
Special meaning of ‘sales’ and ‘purchases’
 Both
‘sales’ and ‘purchases’ have a
special meaning in accounting.
 Purchases means the purchase of those
goods which the business buys with the
sole intention of selling.
 Sales means the sale of those goods in
which the business normally deals and
which were bought with the prime intention
of resale.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.18
Learning outcomes
You should have now learnt:
 That it is not appropriate to use an
inventory account to record increases and
decreases in inventory because inventory
is normally sold at a price greater than its
cost
 That inventory increases either because
some inventory has been purchases or
because the inventory that was sold has
been returned by the buyer
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.19
Learning outcomes (Continued)
That inventory decreases either because
some inventory has been sold or because
inventory previously purchased has been
returned to the supplier
 That a purchase account is used to record
purchases of inventory (as debit entries in
the account) and that a return inwards
account is used to record inventory
returned by customers (as debit entries in
the account)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.20
Learning outcomes (Continued)
That a sales account is used to record
sales of inventory (as credit entries in the
account) and that a return outwards
account is used to record inventory
returned to suppliers (as credit entries in
the account)
 How to record increases and decreases of
inventory in the appropriate accounts

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.21
Learning outcomes (Continued)
That in accounting, the term ‘purchases’
refers to purchases of inventory. Acquisitions
of any other assets, such as vans, equipment
and buildings, are never described as
purchases
 That in accounting, the term ‘sales’ refers to
sales of inventory. Disposals of any other
assets, such as vans, equipment and
buildings, are never described as sales
 That purchases for cash are never entered in
the supplier’s account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 3.22
Learning outcomes (Continued)
 That
purchases on credit are always
entered in the supplier’s (creditor’s)
account
 That sales for cash are never entered in
the customer’s account
 That sales on credit are always entered in
the customer’s (debtor’s) account
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
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