B.Com.(Prog.) Semester-I COMMERCE
FINANCIAL ACCOUNTING
Core Course - I
Unit : (II-V)
SCHOOL OF OPEN LEARNING
University of Delhi
Department of Commerce
, CONTENTS
UNIT-II – Depreciation Accounting and Inventory Valuation
Lesson 1 : Inventory
Lesson 2 : Methods of Inventory Valuation
UNIT-III – Accounting for Hire Purchase and Lease Transactions
: Lease Transactions: Concept & Classification
UNIT-IV – Branch and Departmental Accounting
: Accounting for Branches and Departments
UNIT-V – Computerized Accounting System
Lesson 1 : Computerized Accounting System
Lesson 2 : Groups and Ledgers
Lesson 3 : Trial Balance, Cash Flow Statement and Reports
OR
UNIT-V – Accounting for Partnership Firm
Lesson 1 : Partnership Accounts: Admission of a Partner
Lesson 2 : Partnership Accounts: Retirement / Death of a Partner
Lesson 3 : Accounting for Dissolution of Partnership Firms
Lesson 4 : Application of Piecemeal Distribution
Editor: Written by :
K.B.Gupta Sumita Jain
Aanchal Jain
SCHOOL OF OPEN LEARNING
University of Delhi
5, Cavalry Lane, Delhi-110007
, Unit-II
LESSON-1
INVENTORY
Sumita Jain
Structure of the Chapter
1.1 Meaning of Inventory
1.2 Significance of Inventory Valuation
1.3 Inventory Record Systems - Periodic and Perpetual
1.4 Inventories Taking
1.5 Methods of Inventory Valuation- Introduction of FIFO, LIFO and Weighted Average
1.6 Summary
1.7 Exercise: Multiple Choice Questions
1.1 Meaning of Inventory
The term "inventory" or "merchandise" or "stock-in-trade" means a complete list of goods that a
business has for sale at a given time. In accounting, inventory also includes goods that are in
different stages of production, i.e. work-in-progress.
As per Accounting Standard (AS) 2 issued by the Institute of Chartered Accountants of India
(ICAI), the inventory assets are:
(A) held for sale in the normal course of business (finished goods);
(B) in the process of production for such sales (raw materials and work-in-progress); or
(C) as materials or supplies consumed in the production process or in the rendering of services
(stores, parts, raw materials, consumables).
(d) inventory does not include machinery.
The inventory includes goods purchased and held for resale, for example, goods purchased by a
retailer and held for resale, computer software held for resale, or land and other property held for
resale. Inventory also consists of finished goods or works in progress produced by the enterprise and
includes materials, maintenance supplies, consumables, and loose equipment intended for use in the
production process. Inventory does not include machinery parts that can only be used in relation to
an item of fixed asset and whose use is expected to be irregular; such machinery parts are accounted
for in accordance with Accounting Standard (AS) 10, Property Plant and Equipment.
Types of Inventories
In case of Manufacturing concerns In case of Trading concerns
Raw material Finished goods
Work-in-progress
Finished goods
1
, The types of inventions are related to the nature of the business. The inventories of a trading concern
are primarily from products purchased for resale in their actual form. It may also contain a list of
supplies such as wrapping paper, cartons and stationery. The inventories of a manufacturing concern
include several types of inventories: raw materials, factory supplies, work processes and finished
products.
At the end of the year each trading entity is required to find the closing balance of inventory which
includes raw material inventory, work-in-process, finished goods and miscellaneous items. The
value of the closing stock is shown on the credit side of the trading account and the asset side of the
balance sheet. Therefore, it is necessary to know the value of the inventory before preparing the final
accounts of the business unit.
1.2 Significance of Inventory Valuation
Inventory is generally the most important component of current assets held by a trading or
manufacturing enterprise. This can be 75% or more of the total current assets. It is widely
recognized that the major asset affecting efficiency of operations is inventory. Both, excess of
inventory and shortfall of it affect the production activity and profitability of the enterprise whether
it is manufacturing or trading business. The process of inventory valuation helps to determine the
price at which we will record the inventory in the final accounting statement of the company. Hence,
accurate inventory valuation is necessary to properly represent the company's finances.
Let's take a look at how important inventory valuation is to a company.
1] Determination Of Income
The valuation of inventory is necessary to determine the true income earned by a business entity
during a particular period. To determine gross profit, cost of goods sold is compared with revenue
for the accounting period. The cost of goods sold is calculated as follows:
Cost of Goods Expense = Inventory Opening + Purchase + Direct Expense - Closing Inventory
Inventory valuations will have a major impact on income determination. If valuations are overstated
or understated, it can be explained as:
a. When the closing stock is overstated, the net income for the accounting period will be
overstated.
b. When the opening stock is overstated, the net income for the accounting period will be
understated.
c. When the closing stock is understated, the net income for the accounting period will be
understated.
d. When the opening stock is understated, the net income for the accounting period will be
overstated.
Inventory valuation (closing inventory) has a direct impact on a firm's income determination.
Inaccurate or incorrect valuation of inventory can reduce or increase the profitability of the firm.
2] To Determine The Financial Situation
Inventory is not only part of the trading account, but also a part of the balance sheet. Inventories are
classified as current assets and it is very important to have accurate and correct inventory valuations.
2
FINANCIAL ACCOUNTING
Core Course - I
Unit : (II-V)
SCHOOL OF OPEN LEARNING
University of Delhi
Department of Commerce
, CONTENTS
UNIT-II – Depreciation Accounting and Inventory Valuation
Lesson 1 : Inventory
Lesson 2 : Methods of Inventory Valuation
UNIT-III – Accounting for Hire Purchase and Lease Transactions
: Lease Transactions: Concept & Classification
UNIT-IV – Branch and Departmental Accounting
: Accounting for Branches and Departments
UNIT-V – Computerized Accounting System
Lesson 1 : Computerized Accounting System
Lesson 2 : Groups and Ledgers
Lesson 3 : Trial Balance, Cash Flow Statement and Reports
OR
UNIT-V – Accounting for Partnership Firm
Lesson 1 : Partnership Accounts: Admission of a Partner
Lesson 2 : Partnership Accounts: Retirement / Death of a Partner
Lesson 3 : Accounting for Dissolution of Partnership Firms
Lesson 4 : Application of Piecemeal Distribution
Editor: Written by :
K.B.Gupta Sumita Jain
Aanchal Jain
SCHOOL OF OPEN LEARNING
University of Delhi
5, Cavalry Lane, Delhi-110007
, Unit-II
LESSON-1
INVENTORY
Sumita Jain
Structure of the Chapter
1.1 Meaning of Inventory
1.2 Significance of Inventory Valuation
1.3 Inventory Record Systems - Periodic and Perpetual
1.4 Inventories Taking
1.5 Methods of Inventory Valuation- Introduction of FIFO, LIFO and Weighted Average
1.6 Summary
1.7 Exercise: Multiple Choice Questions
1.1 Meaning of Inventory
The term "inventory" or "merchandise" or "stock-in-trade" means a complete list of goods that a
business has for sale at a given time. In accounting, inventory also includes goods that are in
different stages of production, i.e. work-in-progress.
As per Accounting Standard (AS) 2 issued by the Institute of Chartered Accountants of India
(ICAI), the inventory assets are:
(A) held for sale in the normal course of business (finished goods);
(B) in the process of production for such sales (raw materials and work-in-progress); or
(C) as materials or supplies consumed in the production process or in the rendering of services
(stores, parts, raw materials, consumables).
(d) inventory does not include machinery.
The inventory includes goods purchased and held for resale, for example, goods purchased by a
retailer and held for resale, computer software held for resale, or land and other property held for
resale. Inventory also consists of finished goods or works in progress produced by the enterprise and
includes materials, maintenance supplies, consumables, and loose equipment intended for use in the
production process. Inventory does not include machinery parts that can only be used in relation to
an item of fixed asset and whose use is expected to be irregular; such machinery parts are accounted
for in accordance with Accounting Standard (AS) 10, Property Plant and Equipment.
Types of Inventories
In case of Manufacturing concerns In case of Trading concerns
Raw material Finished goods
Work-in-progress
Finished goods
1
, The types of inventions are related to the nature of the business. The inventories of a trading concern
are primarily from products purchased for resale in their actual form. It may also contain a list of
supplies such as wrapping paper, cartons and stationery. The inventories of a manufacturing concern
include several types of inventories: raw materials, factory supplies, work processes and finished
products.
At the end of the year each trading entity is required to find the closing balance of inventory which
includes raw material inventory, work-in-process, finished goods and miscellaneous items. The
value of the closing stock is shown on the credit side of the trading account and the asset side of the
balance sheet. Therefore, it is necessary to know the value of the inventory before preparing the final
accounts of the business unit.
1.2 Significance of Inventory Valuation
Inventory is generally the most important component of current assets held by a trading or
manufacturing enterprise. This can be 75% or more of the total current assets. It is widely
recognized that the major asset affecting efficiency of operations is inventory. Both, excess of
inventory and shortfall of it affect the production activity and profitability of the enterprise whether
it is manufacturing or trading business. The process of inventory valuation helps to determine the
price at which we will record the inventory in the final accounting statement of the company. Hence,
accurate inventory valuation is necessary to properly represent the company's finances.
Let's take a look at how important inventory valuation is to a company.
1] Determination Of Income
The valuation of inventory is necessary to determine the true income earned by a business entity
during a particular period. To determine gross profit, cost of goods sold is compared with revenue
for the accounting period. The cost of goods sold is calculated as follows:
Cost of Goods Expense = Inventory Opening + Purchase + Direct Expense - Closing Inventory
Inventory valuations will have a major impact on income determination. If valuations are overstated
or understated, it can be explained as:
a. When the closing stock is overstated, the net income for the accounting period will be
overstated.
b. When the opening stock is overstated, the net income for the accounting period will be
understated.
c. When the closing stock is understated, the net income for the accounting period will be
understated.
d. When the opening stock is understated, the net income for the accounting period will be
overstated.
Inventory valuation (closing inventory) has a direct impact on a firm's income determination.
Inaccurate or incorrect valuation of inventory can reduce or increase the profitability of the firm.
2] To Determine The Financial Situation
Inventory is not only part of the trading account, but also a part of the balance sheet. Inventories are
classified as current assets and it is very important to have accurate and correct inventory valuations.
2
