What kind of inventory account

The Inventory object code asset is used to record inventory value, reconcile inventory value after a physical inventory is performed, and transfer cost of goods sold to the inventory operating account. Note: See the object code list below for a detailed list of object codes with their names and descriptions used to record and adjust your inventory and cost of goods sold. Inventory purchases are recorded on the operating account with an Inventory object code, and sales are recorded on the operating account with the appropriate sales object code.

A cost-of-goods-sold transaction is used to transfer the cost of goods sold to the operating account. Safeguard your inventory. Limit access to inventory supply and implement procedures for receiving and shipping. Ensure that all employees responsible for inventory control and accounting entries are knowledgeable about the products and items inventoried.

Storage areas should be locked when operations are closed. High-dollar items should be secured with locks separate from the common storage area. Label and store inventory in a manner that allows you to easily access items and determine the quantity on-hand.

Separate and note obsolete or damaged products and record waste or damaged products on a waste sheet. When discussing inventory, we need to clarify whether we are referring to the physical goods on hand or the Merchandise Inventory account, which is the financial representation of the physical goods on hand.

The difference between perpetual and periodic inventory procedures is the frequency with which the Merchandise Inventory account is updated to reflect what is physically on hand. Under perpetual inventory procedure, the Merchandise Inventory account is continuously updated to reflect items on hand, and under the periodic method we wait until the END to count everything.

The following video explains the difference between periodic and perpetual inventory methods:. Companies use perpetual inventory procedure in a variety of business settings. Historically, companies that sold merchandise with a high individual unit value, such as automobiles, furniture, and appliances, used perpetual inventory procedure. Today, computerized cash registers, scanners, and accounting software programs automatically keep track of inflows and outflows of each inventory item.

Computerization makes it economical for many retail stores to use perpetual inventory procedure even for goods of low unit value, such as groceries. Under perpetual inventory procedure, the Merchandise Inventory account provides close control by showing the cost of the goods that are supposed to be on hand at any particular time.

Companies debit the Merchandise Inventory account for each purchase and credit it for each sale so that the current balance is shown in the account at all times. Usually, firms also maintain detailed unit records showing the quantities of each type of goods that should be on hand.

Company personnel also take a physical inventory by actually counting the units of inventory on hand. Then they compare this physical count with the records showing the units that should be on hand.

Merchandising companies selling low unit value merchandise such as nuts and bolts, nails, Christmas cards, or pencils that have not computerized their inventory systems often find that the extra costs of record-keeping under perpetual inventory procedure more than outweigh the benefits.

The direct cost method of inventory assigns a value to an item that is individual to that one item. This method is most often used with highly customized items, such as art, or specialty items built for the consumer, such as luxury boats.

Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.

By Kaye Morris. Average Cost The average cost method assigns value to ending inventory based on an average cost to purchase the inventory over the accounting period. Direct Cost The direct cost method of inventory assigns a value to an item that is individual to that one item.