Interactive Inventory Handout Prototype

ACCOUNTING FOR INVENTORY

COST OF PURCHASE

Calculate Total Cost of Purchases

Original Inventory Value: $40,000

Additional Costs Incurred:

  • Insurance for goods in transit: $200
  • Wages for employees involved in repacking goods: $850
  • Transport fees: $800
  • Custom duties: $974
  • Packing materials: $176

Calculate the total cost of purchases. This includes the initial inventory value plus all costs to bring the goods into a saleable condition.

Mistake 1: Excluding relevant costs. Remember to include *all* direct costs incurred to bring the inventory to its present location and condition. This includes freight-in, customs duties, and costs for repacking or preparing goods for sale.

Mistake 2: Including irrelevant costs. Do NOT include selling costs (like salesperson salaries), administrative overheads, or storage costs if they are not part of making the goods saleable. These are typically operating expenses.

Tip: Think of it as "what did it cost us to get this item ready to sell to our customer?"

Journal Entries for Inventory Purchased

Based on the calculated total cost, prepare the journal entry to record the purchase of inventory.

Account Debit ($) Credit ($)

(Goods + all costs to put the goods into a )

Correct Solution:

Total Cost of Purchases: $40,000 + $200 + $850 + $800 + $974 + $176 = $43,000

Journal Entry:

Dr Inventory                  $43,000
Cr Trade Payable/Cash         $43,000
(Goods + all costs to put the goods into a saleable condition)

Explanation: Inventory is an asset, so an increase is debited. Trade Payable/Cash is a liability/asset, so an increase in payable or decrease in cash is credited.