Key terms to note:
Inventories are current assets:
- held for sale in the ordinary course of business,
- in the process of production for such sales;or
- in the form of materials or supplies to be consumed in the production process or in the rendering of services
Net realizable value:
- Is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale
Inventories can include any of the following:
- Goods purchased and held for resale, eg goods held for sale by a retailer or land & building for resale
- Finished goods produced
- Work in progress being produced
- Materials and supplies awaiting use in the production process(raw materials)
Therefore some COMMON classifications of inventories often seen in the balance sheet are:
Merchandise; Production supplies; Materials; Work-In-Progress and Finished Goods
How do we measure or value inventories:
- Inventories should be measured at the LOWER of cost and net realizable value. re: the value of these inventories is calculated by taking the lower of cost and net realizable value for EACH SEPARATE item or GROUP of inventory items.
The COST of inventories comprises:
(a) Purchase
( viz: purchase price + import duties+ taxes +transport+handling & any other cost directly attributable to the acquisition of finished goods, services and materials less trade discount,rebates & other similar reduction)
(b) Costs of conversion
Consists of two parts (a) cost directly related to the unit of production,eg direct materials, direct labour (b) fixed and variable production overheads that are incurred in converting materials into finished goods, allocated on a systematic basis.
(c) Other costs incurred in bringing the inventories to their present location and condition.
Methods to measure or value inventories:
- First-in, first-out (FIFO) method
- Last-in, first-out (LIFO) method
- Weighted average cost method.
- Standard costs
ACCOUNTING TREATMENT OF INVENTORIES:
(a) The value of closing inventories is accounted for in the NOMINAL LEDGER by
debiting an inventory account and crediting the trading account at the end f an accounting period.
{ The inventory will therefore always have a debit balance at the end of a period and this balance will be shown in the balance sheet as a current asset for inventories }
(b) OPENING INVENTORIES brought forward in the inventory account are transferred to the trading account and so at the end of the accounting year, the balance on the inventory account ceases to be the opening inventory b/f, and becomes instead the closing inventories c/f
Tags: inventories
Below is a bookkeeping test question ( with answer) on the interpretation of accounts:
INTERPRETATION OF ACCOUNT ACCOUNTING TEST QUESTION NO.1
ANSWER TO INTERPRETATION OF ACCOUNT ACCOUNTING TEST QUESTION NO.1(PART A)
ANSWER TO INTERPRETATION OF ACCOUNT ACCOUNTING TEST QUESTION NO.1 (PART B)
ANSWER TO INTERPRETATION OF ACCOUNT ACCOUNTING TEST QUESTION NO.1 (PART C)
Below is an accounting or bookkeeping question with answer on simple limited company which asked for a profit and appropiration account and balance sheet to be drawn up:-
SIMPLE LIMITED COMPANY ACCOUNT ACCOUNTING TEST QUESTION NO.1
ANSWER TO LIMITED COMPANY ACCOUNT ACCOUNTING TEST QUESTION NO.1(PART A)
ANSWER TO LIMITED COMPANY ACCOUNT ACCOUNTING TEST QUESTION NO.1 (PART B)
Below is a question with answer on stock valuation:
STOCK VALUATION ACCOUNTING TEST QUESTION NO.1
ANSWER TO STOCK VALUATION ACCOUNTING TEST QUESTION NO.1(PART B)
ANSWER TO STOCK VALUATION ACCOUNTING TEST QUESTION NO.1(PART A)
More bookkeeping/accounting question and answer on Control or Total accounts:
CONTROL or TOTAL ACCOUNT ACCOUNTING TEST QUESTION NO.1
ANSWER TO CONTROL ACCOUNT ACCOUNTING TEST QUESTION NO.1
CONSIGNMENT ACCOUNT ACCOUNTING TEST QUESTION 1
ANSWER TO CONSIGNMENT ACCOUNT ACCOUNTING TEST NO. 1(PART A)
ANSWER TO CONSIGNMENT ACCOUNT ACCOUNTING TEST NO. 1 (PART B)
ANSWER TO CONSIGNMENT ACCOUNT ACCOUNTING TEST NO. 1(PART A)
Below is a bookkeeping/accounting question on Non Trading Organization:
NON TRADING ACCOUNT ACCOUNTING TEST QUESTION NO.1
ANSWER TO NON TRADING ACCOUNT ACCOUNTING TEST QUESTION NO.1
Below is a simple partnership account with question and answer:
SIMPLE PARTNERSHIP ACCOUNT ACCOUNTING TEST QUESTION NO.1
ANSWER TO PARTNERSHIP ACCOUNT ACCOUNTING TEST QUESTION NO.1 (PART A)
ANSWER TO PARTNERSHIP ACCOUNT ACCOUNTING TEST QUESTION NO.1 ( PART B)
Understand the basic of the different type of Organization Structure- Sole Proprietor ( Part 1 of 3)
In bookkeeping, a bookkeeper needs to at least understand the type of organization structure that one is going to help to prepare the books of accounts.
Below, we describe the three types of organization structure listed with characteristics/key features, advantages and disadvantages of having such structure:
(a) Sole Trade or Sole Proprietor ( Part 1 of 3)
(b) Partnership ( Part 2 of 3)
(c) Limited Company ( Part 3 of 3)
SOLE TRADER OR SOLE PROPRIETOR
CHARACTERISTICS OR KEY FEATURES:
• A one man shop completely responsible for running all aspect of the business
ADVANTAGES:
• A one man shop so able to move quickly to seize opportunity without consulting any other partners, etc,
• Able to have complete freedom to make decisions on the way the business is conducted without reference to anyone else,
• Any assets built up in the business belong 100% to the individual owner and
• The least formal in respect of compliance with government requirements as paperwork is lesser hence might suit the lifestyle and character of the individual
DISADVANTAGESs:
• Assume 100% responsibility for all the debts and liabilities of the business
• As the owner’s personal debt and its business debt is intermingle, hence potential liabilities may increase the debts of the business
• Lack of transparency as the accounts are not publicly inspected or audited. This makes it difficult to contract with public sector organizations who demand a degree of transparency in their business contracts with the private sector.
• Lack of funds to expand further.
• Might incur higher or maximum tax band/liabilities as tax is charged on the amount of net profit left after deducting allowable expenses
Double entry bookkeeping is the method used to transfer our weekly or monthly totals from our books of original entry into the nominal ledger.
Basic rule to remember is that:-
EVERY FINANCAL TRANSACTION gives RISE TO TWO ACCOUNTING ENTRIES, ONE A DEBIT AND THE OTHER A CREDIT.
Also note that:
(a) An increase in an expense ( example rent) or an increase in an asset ( office furniture) is a DEBIT
(b) An increase in revenue ( example sale of goods or services) or an increase in a liability( buying goods or service on credit) is a CREDIT
(c) A decrease in an asset( example making a cash payment) is a CREDIT
(d) A decrease in liability( example paying a creditor) is a DEBIT
EXAMPLES
(a) Purchase of office equipment
DEBIT: Office Equipment ( increase in asset)
CREDIT: Cash at bank ( decrease in asset re: cash at bank decreases)
(b) Purchase of stationery on credit
CREDIT: Accounts Payable ( increase in liability )
DEBIT: Purchases ( item of expense)
© Payment received from a credit customer
CREDIT: Accounts receivable ( decrease in asset)
DEBIT : Cash at bank ( increase in asset)
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