Finished Goods are goods that have undergone the manufacturing process, or goods that have been procured for purposes of reselling, and are in the possession of the company, but have not been sold yet.
In other words, finished goods are complete and ready to be sold units, which are in the company’s possession. These units are also referred to as merchandise, which is mainly owned by the retailer.
From a manufacturing perspective, it can be seen that finished goods inventory can be referred to as a unique asset.
This is because this is the final stage of their inventory, and it has passed through the previous two inventory stages, which were Raw Material Inventory, and Work In Progress Inventory.
On the contrary, as far as trading concerns are concerned, they only possess one type of inventory, which is the Finished Goods Inventory, and because of this, there is no different treatment for this type of account.
Accounting Treatment and Journal Entry
Calculation of the Finished Goods inventory is a very important component for every business, and therefore, it should be calculated properly to give the best results.
This value of inventory is classified as a true value of inventory, and subsequently, record that value of the asset on the business balance sheet.
From an accounting perspective, it is an extremely integral part of the overall process because of the reason it is something that is directly reflected on the financial statements, and therefore, it is of high importance to all the stakeholders.
The respective Journal Entry to record this is as follows:
|Raw Materials Inventory||$200.00|
|Work in Progress Inventory||$200.00|
|Raw Material Inventory||$200.00|
|Finished Goods Inventory||$200.00|
|Work in Process Inventory||$200.00|
The above journal entry can be seen as a baseline case for when the entity is a manufacturing concern.
In the case where the entity is not a manufacturing concern, the part about the work in progress inventory is simply eliminated, and therefore, the only component left behind is the following entry:
The amount that is recorded for Finished Goods is done using the principle of ‘Lower of Cost or Net Realizable Value’. This is in line with the fact that assets should not be overstated, and should only be mentioned at the amount at which the company expects to sell them for.
Therefore, to conclude, it can be seen that Inventory is something that is extremely crucial to record and properly maintain for any organization.
As far as Finished Goods Inventory is concerned, it should be recorded and maintained properly to ensure the company has clarity regarding the sellable goods that they have on hand, in addition to the fact that inventory is also important to be displayed as a current asset on the balance sheet.
Hence, finished goods are recorded when the corporation has them in possession, and they are sold.