Definition:
Inventories are classed as current assets in the entity’s balance sheet. They normally include a group of liquid assets including raw materials, work in progress, and finished goods which are expected to be converted into cash or cash equivalent within 12 months.
The three main common examples of the entity’s financial statements are income statements, balance sheets, and statements of change in equity.
Among these statements, the balance sheet is one of the statements that inventories are reporting in. These inventories will transfer to the cost of goods sold or expenses in the period they are sold or used.
In the balance sheet, there is three main class of account. They are assets, liabilities, and equity. In Assets, there is two main class. The first is the current assets, and the second is the non-current assets. Inventories are records and shown in the current assets sections.
Three Types of Inventories:
As said above, there are three main types of inventories recorded in the financial statements. They are raw materials, WIP, and Finish goods.
1) Raw Materials:
Raw material refers to all kinds of material used for producing goods. Combining raw material, labor, and direct overhead will lead to work in progress and finished goods.
This kind of material is before any kind of process and if there is any production process for them, we will transfer it to WIP.
Raw materials are classified as current assets at the time of purchasing based on the cost of purchasing and the additional cost of transportation. Cost of raw materials including the cost of purchasing and others related to the cost that brings those materials for production.
2) Work in Progress
Work in progress or work in the process happens when the production process starts, when certain costs, including labor or others, are added to the material.
The valuation of WIP usually is the combination of raw material, labor costs, and direct overhead costs. This cost is based on the stage of completion of products.
WIP is also classified as current assets in the balance sheet at the end of the period. It is classified as current assets become it soon becomes finished goods and is expected to sales in one year.
3) Finish Goods:
Finish goods are recorded and classed as current assets as they were normally sole and convert as cash within one year.
Finish goods can be goods from their own production or goods purchased from suppliers. This kind of liquid asset is expected to sell and convert into cash within 12 periods.
Conclusion:
Inventories normally include raw materials, WIP, and finished goods. They are recorded in balance sheets and classed as current assets under assets categories.
These inventories will charge the cost of sales or expenses in the period they are sold or purchased. They do not depreciate as fixed assets and if the carrying value of inventories is higher than the selling amount, the difference will be written off to net realizable value or written off as expenses in the income statement.
The write-off or write-down of inventories is not considered the cost of goods sold.
Written by Sinra
