Inventory Accounting

📦 Inventory Accounting: Your Store’s Treasure Chest

Imagine you own a toy store. Every toy on your shelves is like gold coins in a treasure chest. Inventory accounting is how you keep track of all those treasures—how many you have, how much they’re worth, and where they’re going!

🎯 What is Inventory?

Inventory = Stuff you plan to sell

Think of it like this: You have a lemonade stand. The lemons, sugar, and cups you bought to make lemonade? That’s your inventory! Once you sell the lemonade, that inventory becomes money in your pocket.

The Big Picture

graph TD
    A["🛒 Buy Inventory"] --> B["📦 Store It"]
    B --> C["💰 Sell It"]
    C --> D["🎉 Make Money!"]

Three types of inventory:

⏰ Periodic Inventory System: Count Day!

Imagine you only count your toys once a month—on “Count Day.” That’s the periodic system!

How It Works

You don’t track every single sale. Instead, you:

1. Start with what you had (Beginning Inventory)
2. Add what you bought (Purchases)
3. Count what’s left (Ending Inventory)
4. Calculate what you sold

The Magic Formula:

Cost of Goods Sold = Beginning + Purchases - Ending

Real Example 🍎

You sell apples at school:

• Start of week: 50 apples
• Bought this week: 100 apples
• End of week count: 30 apples
• You sold: 50 + 100 - 30 = 120 apples!

When to Use It

✅ Small businesses ✅ Not many products ✅ Sales happen slowly ❌ NOT for busy stores

🔄 Perpetual Inventory System: Always Watching!

This is like having a camera on your toy box 24/7. Every time a toy comes in or goes out, you write it down immediately.

How It Works

graph TD
    A["📦 Item Arrives"] -->|+1| B["Update Count"]
    C["🛒 Item Sold"] -->|−1| B
    B --> D["Always Know Exact Count"]

Every single transaction updates your records!

Real Example 🎮

You run a video game store:

• Customer buys Mario Kart → Computer: “Mario Kart: 15 → 14”
• Shipment arrives → Computer: “Mario Kart: 14 → 24”
• You ALWAYS know you have 24 Mario Karts!

Periodic vs Perpetual: Quick Compare

💵 Inventory Costing Methods: Which Apple Costs What?

Here’s a puzzle: You bought apples at different prices. When you sell one, which price do you use?

There are four ways to figure this out!

1. FIFO (First-In, First-Out) 🥇

“Oldest stuff sells first” — Like eating the oldest bread first!

Example:

• January: Bought 10 toys @ $5 each
• February: Bought 10 toys @ $7 each
• Sold 5 toys → Cost = 5 × $5 = $25

(You use the January price because those came in first!)

2. LIFO (Last-In, First-Out) 🆕

“Newest stuff sells first” — Like taking the top plate from a stack!

Same Example:

• January: Bought 10 toys @ $5 each
• February: Bought 10 toys @ $7 each
• Sold 5 toys → Cost = 5 × $7 = $35

(You use February’s price because those came in last!)

3. Weighted Average 📊

“Mix everything together” — Like making one big smoothie!

Example:

• 10 toys @ $5 = $50
• 10 toys @ $7 = $70
• Total: 20 toys for $120
• Average cost: $120 ÷ 20 = $6 per toy
• Sold 5 toys → Cost = 5 × $6 = $30

4. Specific Identification 🏷️

“Track each item individually” — Like naming each toy!

Used for expensive, unique items:

• Cars (each has a VIN number)
• Diamonds
• Artwork

Visual Summary:

graph TD
    A["Inventory Costing Methods"] --> B["FIFO"]
    A --> C["LIFO"]
    A --> D["Weighted Average"]
    A --> E["Specific ID"]
    B --> F["Oldest First"]
    C --> G["Newest First"]
    D --> H["Blend Everything"]
    E --> I["Track Each One"]

📉 Inventory Valuation: What’s It Really Worth?

Just because you paid $100 for something doesn’t mean it’s worth $100 today!

Lower of Cost or Market (LCM) Rule

“Be cautious, be safe!”

You report inventory at whichever is LOWER:

• What you paid (Cost)
• What it’s worth now (Market value)

Real Example 📱

You bought phones for $500 each. New model came out. Now they’re worth only $300.

Which do you use?

• Cost: $500
• Market: $300
• Answer: $300 (the lower one!)

Why? We don’t want to pretend we have more value than we actually do. That would be lying to ourselves!

Net Realizable Value (NRV)

NRV = Selling Price - Costs to Sell

Example: A dress worth $100, but needs $20 in alterations:

• NRV = $100 - $20 = $80

⚠️ Inventory Errors: Oops Moments!

Mistakes in counting inventory cause a domino effect. Like knocking over one domino and watching them all fall!

The Domino Effect

graph TD
    A["❌ Wrong Ending Inventory"] --> B["❌ Wrong Cost of Goods Sold"]
    B --> C["❌ Wrong Profit"]
    C --> D[❌ Wrong Next Year's Numbers!]

Error Type 1: Overcount (Said You Have MORE)

If ending inventory is TOO HIGH:

You look richer than you are!

Error Type 2: Undercount (Said You Have LESS)

If ending inventory is TOO LOW:

You look poorer than you are!

The Self-Correcting Miracle 🪄

Here’s the cool part: Inventory errors fix themselves over TWO years!

• Year 1: Ending inventory too high → Profit too high
• Year 2: Beginning inventory too high → Profit too low
• Over 2 years: They cancel out!

But this doesn’t make errors OK—they still mess up each year’s picture!

🚚 Goods in Transit: Who Owns the Flying Toys?

When toys are on a truck between seller and buyer, who owns them? It depends on the shipping terms!

FOB Shipping Point 📍

“Free On Board at SHIPPING point”

The moment goods leave the seller’s warehouse → BUYER owns them!

graph LR
    A["🏭 Seller's Warehouse] -->|Goods leave| B[🚚 Truck]
    B --> C[🏪 Buyer's Store"]
    style A fill:#ffcccc
    style B fill:#ccffcc
    style C fill:#ccffcc

Green = Buyer’s responsibility

Buyer’s inventory includes goods on the truck!

FOB Destination 🏁

“Free On Board at DESTINATION”

Goods arrive at buyer’s location → THEN buyer owns them!

graph LR
    A["🏭 Seller's Warehouse] --> B[🚚 Truck]
    B -->|Goods arrive| C[🏪 Buyer's Store"]
    style A fill:#ccffcc
    style B fill:#ccffcc
    style C fill:#ccccff

Green = Seller’s responsibility until arrival

Seller’s inventory includes goods on the truck!

Quick Memory Trick 🧠

Memory Trick:

• “Shipping Point” → Buyer pays Shipping
• “Destination” → Seller Delivers

🎁 Wrapping It All Up!

You now understand how businesses track their treasures:

1. Inventory Overview — Your sellable stuff
2. Periodic System — Count occasionally
3. Perpetual System — Track constantly
4. Costing Methods — FIFO, LIFO, Average, Specific
5. Valuation — Lower of Cost or Market
6. Error Effects — Mistakes ripple through
7. Goods in Transit — FOB rules determine ownership

Remember: Good inventory tracking = Smart business decisions!

You’re now an inventory accounting champion! 🏆