Inventory of finished goods

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This discussion clarifies the accounting entries for finished goods and work-in-progress inventory. When inventory accounts are debited, corresponding expense accounts like raw materials, employee benefits, and electricity are credited. This process capitalises these costs into the inventory value. Even if no goods are sold, the Profit & Loss statement will show a change in inventory, reflecting the value of goods produced and held at year-end, while the balance sheet shows this investment.

Rahul Jain

Rahul Jain (Querist)

24 November 2024 WHICH ACCOUNTS ARE CREDITED WHILE DEBITING INVENTORY(finished goods and work in progress)ACCOUNTS.

Furthermore in the credited accounts the expenses towards inventory will get reduced the why is the need to show change in inventory of finished goods and work in progress in P&L

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

24 November 2024 Finished Goods Account is typically credited when goods are sold, written off, or moved to a lower-value account.
Work in Progress Account is credited when the goods are transferred to Finished Goods or when costs are settled (materials, labor, overhead).

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Rahul Jain

Rahul Jain (Querist)

24 November 2024 Basically my question is let’s take an example we started a business by 100000 Rs and this 100000rs is converted into finished good inventory. Now at the end of year we have inventory of 100000. So
Inventory Dr
To raw material Cr
To employee benefit Cr
To electricity Cr
This entry will pass.
Now the credit entry will nullify the expenses related to the product made.
But in statement of P&L under change in inventory Rs 100000 will be shown which is incorrect. Which is the wrong step

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

24 November 2024 You started the business with Rs. 100,000, which was converted into finished goods inventory.
At the end of the year, you have Rs. 100,000 in inventory.
The inventory transactions in terms of raw material, employee benefits, and electricity costs are credited to remove the expenses that have been capitalized into inventory.
When the raw materials, employee benefits, and electricity are used in production, they are capitalized as part of the inventory.
Inventory Dr 100000
To Raw Material Cr 50000
To Employee Benefit Cr 30000
To Electricity Cr 20000

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

24 November 2024 Unless you sell any of finished goods, your P&L account nullifies due to capitalization of expenses. So the Balance sheet will reflect your investment against equal amount of finished goods.

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