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

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, 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

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)