If you have learned the concept of inventory valuation in accounting, this lesson will be easy for you because at the end of the year, we calculate the value of inventory not on its real purchase value but on the different methods like LIFO, FIFO and others. Reason behind all the valuation is to show the correct value of inventory. You know that we buy inventory at different time at different prices.
There are lots of normal and abnormal losses which may be happened during the period. So, it is very necessary to adjust the value of inventory.
For adjusting inventory value in accounting, we are giving simple following steps:
1st Step : Calculate the Actual Quantity of Inventory
It is the possible that actual quantity of inventory may be different from your book quantity. So, if you do not calculate the actual quantity of inventory and adjust it with book figure, your balance sheet will not present actual financial position. So, create an audit team. This team will go to plants and showrooms of company and will check physically and will calculate the actual quantity of raw material, work in process and finished goods.
2nd Step : Compare the Actual Quantity of Inventory with books Value
Difference between actual quantity and book quantity will be loss. This loss may be natural or it may happen due to cheating. So, you have to find this loss because this is our business loss. It has to deduct from our business income.
3rd Step : Adjustment of Inventory's Value
If loss is normal, your only book quantity will decrease but if loss is abnormal, your book quantity and value both will decrease. We can pass the journal entry of abnormal loss
Abnormal Loss Account Dr.
Trading Account Cr.
(Entry of abnormal loss during the year)
After this adjustment, your income statement will show correct income position. It will be also helpful for showing correct financial position in balance sheet because we decrease this loss value from book value of inventory.
There are lots of normal and abnormal losses which may be happened during the period. So, it is very necessary to adjust the value of inventory.
For adjusting inventory value in accounting, we are giving simple following steps:
1st Step : Calculate the Actual Quantity of Inventory
It is the possible that actual quantity of inventory may be different from your book quantity. So, if you do not calculate the actual quantity of inventory and adjust it with book figure, your balance sheet will not present actual financial position. So, create an audit team. This team will go to plants and showrooms of company and will check physically and will calculate the actual quantity of raw material, work in process and finished goods.
2nd Step : Compare the Actual Quantity of Inventory with books Value
Difference between actual quantity and book quantity will be loss. This loss may be natural or it may happen due to cheating. So, you have to find this loss because this is our business loss. It has to deduct from our business income.
3rd Step : Adjustment of Inventory's Value
If loss is normal, your only book quantity will decrease but if loss is abnormal, your book quantity and value both will decrease. We can pass the journal entry of abnormal loss
Abnormal Loss Account Dr.
Trading Account Cr.
(Entry of abnormal loss during the year)
After this adjustment, your income statement will show correct income position. It will be also helpful for showing correct financial position in balance sheet because we decrease this loss value from book value of inventory.
Remember : ( 1 )We will deduct loss from inventory on after its calculation from valid inventory method like FIFO, LIFO or other. (2) You can also take the help of different accounting software which will be helpful for tracking the inventory. If you want to learn tracking the inventory through accounting software.
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