What is Inventory? Guide to Inventory Accounting

The article will help you understand: What is inventory? Types of inventory? Regular inventory method, periodic inventory and inventory accounting.

I. Legal basis

Pursuant to accounting standard No. 02 issued and promulgated under Decision No. 149/2001/QD-BTC dated December 31, 2001 of the Ministry of Finance. 

II. What is inventory?

Inventories are assets purchased for sale or use in production or provision of services during the period, which are in the process of production and business.

III. Inventory classification

Pursuant to Clause 2, Article 22 of Circular 133/2016/TT-BTC, the provisions on enterprise inventories include:

1. Goods;
2. Finished product;
3. Unfinished products;
4. Raw materials;
5. Tools;
6. Purchased goods are on the way;
7. Goods sent for sale.

III. Methods of accounting for inventory declaration

According to Clause 1, Article 22 of Circular 133/2016/TT-BTC, based on the inventory account group used to reflect the current value and promptly update the inventory fluctuation situation or used to reflect the beginning and end inventory value of the enterprise. Therefore, there are 2 methods of inventory declaration:

1. Regular declaration method

It is a method of regular and continuous monitoring, promptly reflecting the import and export situation of inventory, and can calculate the export value at any time. 

The formula for calculating the value of ending inventory is shown:

2. Periodic inventory method

This is a method of reflecting the inventory at the beginning and end of the period, not regular and continuous, so only the value of goods sold at the end of the period is calculated.

The formula shows:

 

IV. How to account for inventory

1. According to the regular declaration method

1.1. Importing goods, tools, equipment, and raw materials into warehouse:

Debit account 152: Value of raw materials;

Debit account 153: Value of tools and equipment;

Debit account 156: Value of goods;

Debit account 133: Input VAT of goods;

Credit account 111/112/331…: Total payment amount.

➤ In case the invoice has been received but by the end of the period the raw materials, tools, equipment, and goods have not arrived in the warehouse, the accounting will be based on the invoice:

Debit account 151: Value of purchased goods in transit;

Debit account 133: Input VAT of goods;

Credit account 111/112/331,…: Total payment amount. 

➞ After raw materials, tools, and goods in transit have been imported into the warehouse:

Debit account 152: Value of raw materials;

Debit account 153: Value of tools and equipment;

Debit account 156: Value of goods;

Credit account 151: Value of purchased goods in transit.

➤ In case of trade discount or sales discount:

Debit account 111/112/331…: Value of discounted goods;

Credit account 156: Value of goods (if in stock);

Credit account 632: Cost of goods sold (if goods have been sold);

There is account 133: Input VAT of goods.

➤ In case of purchasing goods by installment payment:

Debit account 156: Value of goods at purchase price paid immediately;

Debit account 133: Input VAT of goods;

Debit account 242: Late payment interest = Amount to be paid – purchase price if paid immediately;

Credit account 331: Total price to be paid.

➞ Periodically when calculating interest when buying goods on installments:

Debit account 635: Interest paid late for that period;

Credit account 242: Interest paid late for that period.

➤ Accounting for costs when purchasing goods:

Debit account 156: Cost of purchasing goods;

Debit account 133: Input VAT of cost when purchasing goods;

Credit account 111/112/331…: Total payment amount.

>> See more: Calculating VAT by deduction method.

1.2. Goods sold or transfer of unfinished costs of service provision:

Debit account 632: Cost of goods sold;

Credit account 156: Value of goods sold.

1.3. Processed or manufactured goods:

➤ When goods are sent for processing or manufacturing:

Debit account 154: Value of goods sent for processing;

Credit account 156: Value of goods sent for processing.

 ➞ Cost of processing and manufacturing goods:

Debit account 154: Cost of processing or manufacturing goods;

Debit account 133: Input VAT of processing or manufacturing costs of goods;

Credit account 111/112/331,…: Total payment amount.

  ➞ When importing processed or manufactured goods:

Debit account 156: Value of goods after processing or manufacturing;

Credit account 154: Value of goods after processing or manufacturing.

1.4. Exporting goods for sale:

Debit account 157: Goods sent for sale;

Credit account 156: Goods sent for sale.

2. According to the periodic inventory method

➤ At the beginning of the period, the value of goods ending in the previous period is transferred to the value of goods in inventory at the beginning of the period:

Debit account 611: Purchases;          

Credit account 156: Goods.

➤ After checking the quantity and value of ending inventory:

Debit account 156: Goods;           

Credit account 611: Purchases.

➤ After checking the quantity and value of ending inventory:

Debit account 632: Cost of goods sold;           

Credit account 611: Purchases.

V. Frequently asked questions about inventory