It is that stock carried forward from the previous accounting period or the financial year, i.e., 31st March of the same year. Opening inventory refers to the available stock’s value as at the beginning of an accounting period, i.e., 1st April of a year. If you add the opening inventory to the cost of production during the year, it would be equal to the cost of sales and the closing inventory totalled. These two terms help a business owner ascertain the cost of goods sold during the past financial year. The terms opening inventory and closing inventory are also referred to as opening stock and closing stock. What is opening inventory and closing inventory? The figure is reduced by estimated completion and sale costs for that item. Whereas, net realisable value refers to the selling price estimated in the ordinary course of business. It does not include selling and distribution expenses. Purchase costs include non-refundable taxes incurred, freight, trade discounts, additional direct and variable costs to acquire the item. The inventory cost includes the purchase, conversion, service, and all other expenses incurred by a business to bring the stock to its current location and form. The standards direct every business to value inventory as the lower of cost or net realisable value. These include raw materials, work in progress or semi-finished goods, finished goods and maintenance supplies, or the Maintenance, Repair, and Overhaul (MRO). There are various types of inventory or classifications prevalent among businesses. However, certain items are not classified as inventory, such as livestock, agricultural produce, mineral oils and gas. It means any asset held for sale or resale in the short term more regularly by a business will be termed inventory, stock, or merchandise. It further covers raw materials, inputs, and services used to produce finished goods or resale.It also covers those processed while in production, to be sold later on.It can be held for selling in the market during the ordinary course of business.Inventory are assets that satisfy the below criteria. Then, it may be subject to the ICDS-II under the Income Tax Act, which also defines inventory. Suppose the entity is not a company but follows the mercantile basis of accounting with business or professional income. Further, Ind AS 2 notified under the Companies (Indian Accounting Standard) Rules, 2015 also provides the definition. The notified AS 2 as per the Companies (Accounting Standards) Rules, 2006 defines the term inventory. Inventory includes raw materials in stock, semi-finished goods in the factory and warehouse, and the finished products ready for sale in a manufacturing concern. The risk of such a write down increases if inventory is held for a long period of time, or if market prices are volatile.The inventory of a business covers all goods, merchandise, and materials held by it for sale. In addition, if it is found that the market value of inventory items has declined, they are to be recorded at the lower of their cost or market value. How to Account for Ending InventoryĮnding inventory is recorded at its acquisition cost. A variation where goods are purchased in final form from manufacturers and then resold is called merchandise. The final type of inventory is finished goods, which is fully complete goods, ready for sale. The second inventory type is work-in-process, which is raw materials that are in the process of being transformed into finished goods. The first is raw materials, which is the materials used to construct completed goods, which have not yet been transformed. Under the periodic system, the cost of goods sold is derived as follows:Ĭost of goods sold = Beginning inventory + Purchases - Ending inventoryĮnding inventory is comprised of three types of inventory. The aggregate cost of this inventory is used to derive the cost of goods sold of a business that uses the periodic inventory system. Ending inventory is the cost of those goods on hand at the end of a reporting period.
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