What is Inventory management?

What is Inventory management?

Inventory management is the process of ordering, storing, and selling inventory. Which includes the management of raw materials components & finished goods (products).

There are two commonly used systems for managing inventory records i.e., Periodic inventory system and perpetual inventory system.

Periodic Inventory System

In a periodic inventory system, inventory balance is not maintained on a day to day basis. All new purchases of inventory are recorded in the “Inventory Purchases” account in the general ledger while in case of sales, entry is made only for the revenue and no entry is entered to record the use of inventory. As a result, trial balance contains “opening inventory” and “inventory purchases” accounts. The closing entry is determined at the year-end by physical counting and corresponding closing entry is recorded in accounts to reflect the impact of inventory consumed during the period. Accounting entries under the periodic system would be as follows:

  1. Entry for purchase of inventory

Description

Debit

Credit

 Inventory Purchases

****

 

                   Bank Account

 

****

2.  Entry for sale of goods

Description

Debit

Credit

 Accounts Receivable

****

 

                   Sales Account

 

****

3. Closing entry at year end to record the consumed inventory and closing stock

Description

Debit

Credit

 Closing Inventory

****

 

 Cost of Goods Sold

****

 

Inventory Purchases

 

****

Opening inventory

 

****

Perpetual inventory system

In contrast to the periodic inventory system, accounting entries are recorded for each individual purchase and sale transaction i.e. inventory account is updated after each sale. All new purchases are recorded in inventory accounts and that account is constantly updated for all inventory sales. As a result, no closing entry is required at year-end. Accounting entries under the periodic system would be as follows:

  •  Entry for purchase of inventory

Description

Debit

Credit

 Inventory

****

 

                   Bank Account

 

****

  •  Entry for sale of goods

Description

Debit

Credit

 Accounts Receivable

****

 

                   Sales Account

 

****

 Cost of Goods Sold

****

 

                   Inventory

 

****

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