Bookkeeping Entries for Inventory Transactions

What You Need to Know About Inventory Transactions

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If your business manufactures products instead of offering services, you'll need to keep accounting records of your inventory transactions. Some companies buy finished goods at wholesale prices and resell them at retail. Others manufacture products, and the first type of inventory transaction would involve buying raw materials inventory, or the materials you use to make your products.

A Transaction Overview

During a manufacturing process, after the inventory leaves the raw materials phase, it is transferred to work-in-process inventory and recorded in the corresponding account by the company bookkeeper (see the second entry in the table below).

The last phase of the production process is finished goods. The last entry in the table below shows a bookkeeping journal entry to record the inventory as it leaves work-in-process and moves to finished goods, ready for sale. A bookkeeper or accountant will make all of these entries in the general ledger's inventory journals for all of the products that you manufacture.

What is the Inventory Cycle of a Company?

The inventory cycle for a company is composed of three phases: the ordering or administrative phase, the production phase, and the finished goods and delivery phase. The ordering phase is the amount of time it takes to order and receive raw materials.

The production phase is the work in progress phase. The last phase is the time the finished goods and remains in stock and the delivery time to the customer. The inventory cycle is measured as a number of days.

For example, the inventory cycle for XYZ Company is 12 days for ordering, 35 days for work in progress, and 20 days for finished goods and delivery.

What is an Accounting Journal?

An accounting journal is a detailed record of the financial transactions of the business. The transactions are listed in chronological order, by amount, by accounts that are affected, and in what direction those accounts are affected.

Depending on the size and complexity of the business, a reference number can be assigned to each transaction, and a note may be attached explaining the transaction.

Example of Journal Entry for Inventory

Here is the scenario. You buy $100 in raw materials to manufacture your product. Here are the bookkeeping entries you should use as the inventory moves through the manufacturing process all the way to finished goods:

Journal Entries for Recording Inventory Transactions

 DebitCredit
Raw Materials Inventory$100.00 
Accounts Payable $100.00
 DebitCredit
Work in Process Inventory$100.00 
Raw Material Inventory $100.00
 DebitCredit
Finished Goods Inventory$100.00 
Work in Process Inventory 

$100.00

 

 

Selling Inventory for Cash

When you move an item from inventory to sell as a product, you move the product from an asset (inventory) to an expense (cost of goods sold). If you sell it for cash, you would also record a bookkeeping entry for a cash transaction and credit the sales revenue account for the sale. Here are the bookkeeping entries you would use when you sell an item of inventory for cash.

In this scenario, you have sold an item for $100, and you're recording the transactions to move it from inventory to sales.

Cost of Goods Sold Journal and Cash Journal

 DebitCredit
Cost of Goods Sold$100.00 
Finished Goods Inventory $100.00
 DebitCredit
Cash$100.00 
Sales $100.00

​​For more insight into how to make journal entries, read Small Business Owner? Here's How to Make Entries in Your Accounting Journal.