Bookkeeping Entries for Inventory Transactions

What You Need to Know About Inventory Transactions

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If your business produces products instead of services, you have to deal with inventory in your bookkeeping. The first type of inventory to produce a product is raw materials inventory -- the materials you use to manufacture your product.

After the inventory leaves the raw materials phase, it is transferred to work in process inventory. That is the second entry in the table.

The last phase of product production is finished goods.

The last entry in the table below shows the journal entry when the inventory leaves work in process and moves to finished goods. All of these journal entries should be made in your Inventory Journals for all of your products that you manufacture.

What is the Inventory Cycle of a Company?

The inventory cycle for a company is composed of three phases: the ordering or administrative phase, the production phase, and the finished goods and delivery phase. The ordering phase is the amount of time it takes to order and receive raw materials. The production phase is the work in progress phase. The last phase is the time the finished goods and remain in stock and the delivery time to the customer. The inventory cycle is measured as a number of days.

For example, the inventory cycle for XYZ Company is 12 days for ordering, 35 days for work in progress, and 20 days for finished goods and delivery.

What is an Accounting Journal?

An accounting journal is a detailed record of the financial transactions of the business.

The transactions are listed in chronological order, by amount, by accounts that are affected, and in what direction those accounts are affected. Depending on the size and complexity of the business, a reference number can be assigned to each transaction and a note may be attached explaining the transaction.

Example of Journal Entry for Inventory

Here is the scenario. You buy $100 in raw materials to manufacture your product. Here is the bookkeeping entries you should use as the inventory moves through the manufacturing process all the way to finished goods:

Journal Entries for Inventory

 DebitCredit
Raw Materials Inventory$100.00 
Accounts Payable $100.00
 DebitCredit
Work in Process Inventory$100.00 
Raw Material Inventory $100.00
 DebitCredit
Finished Goods Inventory$100.00 
Work in Process Inventory 

$100.00

 

 

 

Selling Inventory for Cash

When you move an item from inventory to sell as a product, you move the product from an asset (inventory) to an expense (cost of goods sold). If you sell it for cash, you also have to record a bookkeeping entry for a cash transaction and credit for the sale. Here are the bookkeeping entries you would use when you sell an item of inventory for cash.

The scenario is that you sell an item you move from inventory for $100.

Cost of Goods Sold Journal and Cash Journal

 DebitCredit
Cost of Goods Sold$100.00 
Finished Goods Inventory $100.00
 DebitCredit
Cash$100.00 
Sales $100.00

 

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