Accounting (Basics) - Lecture 5
INVENTORY ACCOUNTING METHODS, ITS VALUATION, INVENTORYING AND ANALYTICAL EVIDENCE. SPECIFIC
ACOCUNTING TECHNIQUES CONCERNING INTERNALLY PRODUCED INVENTORY. STRANGE CASES OF INVENTORY
ACCOUNTING AT THE END OF ACCOUNTING PERIOD.

Content
nInventory accounting methods, its valuation, inventorying and analytical evidence
nSpecific accounting techniques concerning internally produced inventory
nStrange cases of inventory accounting at the end of accounting period
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Inventory accounting methods
nAccording to list of accounts, inventories can be divided into several accounting groups -
material, own inventories (products, intermediate products, incomplete products, etc.), merchandise
(goods) and animals (used for trade, animals held for breeding are charged as fixed assets). nThere
are two ways of charging about inventories – way A and way B. nThe concrete way of charging depends
on company’s decision.
n
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Inventory accounting methods
nIt is even possible to use both ways simultaneously (for example for charging about material and
goods can be used way A and for charging about own inventories (products, incomplete products,
etc.) can be used way B. nThe chosen way of charging should be defined in internal accounting
regulation issued by company.
n
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The way A
nThis way A of charging means that inventories are charged during the accounting period on accounts
Acquisition of material and Material on stock (or Goods on stock, Acquisition of goods, etc.). nAs
cost (expense) they are charged in the moment of their consumption (in case of material) or their
sale (in case of goods (merchandise)).
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The way A
nSpecial procedures are used for charging about own inventories. nThe own inventories are charged
on asset accounts used for concrete type of own-produced inventories (products, incomplete products
or intermediate products) and the change of the balance of these inventories is charged as a
capitalization of expenses (costs) influencing the profit of the company.
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The way A
nAccounting transactions connected with inventories:
nA) Acquisition of inventories by purchase
nInventories bought are valued by acquisition costs. nIt is suitable to use some special account
for calculation of these acquisition costs (it is purchase price and all costs connected with the
acquisition (especially transportation costs, assembling costs, etc.)).
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The way A
nThis account is usually called Acquisition of material or Acquisition of goods. nIn the moment
when total amount of acquisition costs is known, this value is recharged from these accounts on
concrete asset accounts used for material or goods (Material at stock and Goods at stock).
n
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The way A
nExample:
nCompany buys material on invoice bill in value 10 000 CZK. This material was transported by other
company. The value of transportation is 1 000 CZK (invoice bill). Charge all necessary
transactions.
n
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The way A
nSolution:
n
n
n
nTransactions:
q1) Purchase of material
q2) Transportation
q3) Taking of material into stock in acquisition costs
n
n
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The way A
nB) Consumption (decrease) of inventories
nCosts (expenses) connected with inventories are charged in the moment of consumption of material
or decrease of goods sold.
n
nExample:
nCompany consumed material in value 11 000 CZK. Charge this operation.
n
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The way A
nSolution:
n
n
n
n
n1) Consumption of material
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The way A
nC) Charging about own inventories
nOwn inventories are charged on accounts which contains following accounts: Incomplete products,
Intermediate products, Products, Animals. nCorrelated accounts are cost (expense) accounts -
Changes of incomplete products, Changes of intermediate products and Changes of products).
nInventories of own production are valued by own costs (direct (and partly indirect) costs spent
for production of these inventories – wages, consumed material, consumed energy, etc.).
n
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They way A
nExample:
nCompany consumed material in value 1 000 and wages in value 500. On this base the new incomplete
products have been produced. Charge creation and value the incomplete products.
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They way A
nSolution:
nValuation by own costs = 1000 + 500 = 1 500.
n
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They way A
nD) Deficits and surpluses of inventories
nAccounting units have a duty to make stocktaking (minimally to the date of financial statements
compilation) in case of inventories. nStocktaking controls accounting balances of inventories with
real balances. nIf there are differences between these two balances, they must be charged. nIf the
accounting balance is higher than real balance, it is called deficit (charged as operating
expense).
n
n
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They way A
nIf the accounting balance is lower than real balance, it is called surplus (charged as operating
revenue). nIn case of inventories there are two types of deficits caused by different reasons.
nSome deficit can happen because of a nature decrease of the inventories (for example because of
steaming of inventories). nThis kind of deficit is charged as consumption of inventories (account
Consumed material in case of material and account Goods sold in case of goods) (so-called deficit
in norm).
n
n
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They way A
nDeficits caused by employees or third persons (for example steals, destructions, etc.) are charged
on special cost (expense) account named Deficits and damages.
nExample:
nStocktaking at stock found out surplus in case of material in value 10 000 CZK (valuation by
executant acquisition costs) and deficit in case of goods in value 15 000 CZK (valuation by value
in accounting files). The deficit in value 10 000 CZK was caused by drying-up of dyes (deficit in
norm), the deficit in value 5 000 CZK was caused by employees (steal) (deficit above norm). Charge
all necessary transactions:
n
n
n
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The way A
nSolution:
nSurplus:
n
n
n
nDeficit in norm:
n
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The way A
nDeficit above norm:
n
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The way A
nE) Adjusting items connected with inventories nIn case when stocktaking finds out temporary! (not
permanent) decrease of value of inventories, it is necessary to charge the difference between
accounting value and newly found value. nIn this moment so-called adjusting item to inventories
must be charged (also called as impairments).
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The way A
nIn the moment when future stocktaking finds out that the value is back on original amount, this
adjusting item (AI) must be cancelled. nSpecial accounting group for adjusting items to inventories
is created in list of accounts. nCreation of adjusting items is charged as operating cost
(expense), cancelling as decrease of operating cost (expense).
n
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The way A
nExample:
nStocktaking found out that accounting value of material had temporarily decreased from value 10
000 to 6 000 CZK. Next stocktaking found out that the value of inventories had returned on original
amount. Charge all transactions necessary to be charged.
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The way A
nSolution:
n
n
n
n
nTransactions:
q1) Creation of AI
q2) Clearing of AI
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Way B
nThis way of charging about inventories means that asset accounts as Material at stock or Goods at
stock are used only at the beginning (opening balances are charged on them) or at the end of
accounting period). nPurchases of material or goods during the accounting period are charged
immediately into costs (expenses) (Consumed material, Goods sold). nOwn inventories are not charged
during the accounting period.
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Way B
nAt the end of accounting period the opening balances from accounts Material at stock or Goods at
stock are recharged into costs too. nThen stocktaking compares real consumption or other real
decreases with accounting balance and unrealized consumption of inventories or other unrealized
decreases (real) must be recharged from cost accounts to asset accounts (Material at stock, Goods
at stock, etc.).
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Way B
nExample:
nAt the beginning of accounting period the company had material in value 20 000 CZK. Company bought
material on invoice bill in value 10 000 CZK. This material was transported by other company. The
value of transportation is 1 000 CZK (invoice bill). Material in value 7 000 CZK was consumed
during the accounting period. Charge all necessary transactions.
n
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Way B
nCharging at the beginning of accounting period:
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Way B
nCharging during the accounting period:
n
n
n
n
nTransactions:
q1) Purchase
q2) Transportation costs
q3) Real consumption of material will not be charged during the accounting period (in accounting it
was consumed immediately in moment of purchase)
n
n
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Way B
nCharging at the end of accounting period:
n
n
q
q4) Recharging of OB on cost account
q5) Recharging of unconsumed material back to asset account (in this case the value 24 000 is
calculated as the difference between total amount of costs charged on DS of Consumed material and
amount 7 000 which is the value of real consumption. The final balance of account Consumed material
must be 7 000 CZK which is the value of real consumption, the final balance of account Material at
stock will be 24 000, which is unconsumed material. Final balances of accounts Consumed material
and Material at stock must be equal to situation in charging by way A).
n
n
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Special valuation of decrease of inventories of the same kind
nIt is possible to use special valuation procedures for valuation of inventories of the same kind
in the moment of their decrease.
nThese methods are:
nFIFO – first in, first out – means that decreasing inventories are valued by the value of the
oldest delivery (regardless to fact whether the oldest delivery was really consumed). nWeighted
arithmetical average – decreasing inventories are valued by arithmetic average from values of
inventories at the stock.
n
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Special valuation of decrease of inventories of the same kind
nExample:
nCompany bought on February 1 - 30 kg of sand in value 100 CZK/kg, on February 26 next 50 kg of
sand in value 120 CZK/kg and on February 28 last 120 kg of sand in value 150 CZK/kg. On March 2
another 180 kg of sand was consumed. Valuate the consumed sand by the methods FIFO and Weighted
arithmetical average (WAA) and charge all necessary transactions.
n
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Special valuation of decrease of inventories of the same kind
nSolution:
nFIFO – consumed 180 kg will be valued on this way:
nValue = 30 kg x 100 CZK/kg + 50 kg x 120 CZK/kg + 100 kg x 150 CZK/kg = 3 000 +
6 000 + 15 000 = 24 000 CZK
n
nWAA
nAverage value of one kilogram = (30 x 100 + 50 x 120 + 120 x 150) / 200 kg (total amount of bought
kilograms) = (3 000 + 6 000 + 18 000) / 200 = 135
nValue of 180 kg consumed = 180 x 135 = 24 300 CZK.
n
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Special valuation of decrease of inventories of the same kind
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