Accounting Bookkeeping – Inventory Types and Cost

Ana Orwel asked:

Exploring accounting bookkeeping topics, one of the essentials is to learn inventory accounting, since this is one of the most important assets business owns and uses in its activities on a daily basis. This article will explore the main inventory types and present basic concept of inventory value to be accounted for when acquired.

Concept and Types

Inventory is attributed to current asset category since it is being used in the activities of the business within the period shorter than one year. For manufacturing or trading company this is one of the most important assets since it usually generates sales revenue for the business when being sold, i.e. significantly contributed to the profit earning activities.

Following the matching principle of accounting expenses are recognized and included into the Income Statement only when they were incurred to earn revenue. Therefore when inventory is acquired or manufactured it is included into current asset category on the Balance Sheet and is kept there until is being sold or consumed in other way to earn revenue.

When inventory is sold, only cost of sold items is included into the Income Statement – Cost of Goods Sold caption. Inventory remaining on hand is still reflected on the Balance Sheet.

Depending on the type of business activities there might be different categories of inventory, i.e.:

finished goods for sale (manufacturing company) or goods for resale (trading company) work in progress (manufacturing company) raw materials (manufacturing company) consumables (low value items and miscellaneous items to be used in daily business activities)

Business involved in provision of services will usually have consumables, but not inventory for sale.

Cost of Inventory Acquired

There are certain expenses which to be included into the acquisition cost of inventory and accounted for in the Balance Sheet, i.e.: import duties transportation costs (carriage in) – expenses incurred by the buyer to transport inventory to the storage place other costs directly attributable to the acquired inventory (for example assembly, packaging, etc.)

For example if the business have acquired raw materials for $4,500, incurred $340 import duties and paid carriage in costs amounting to $670 (transportation of raw materials to the warehouse), cost of raw materials to be accounted for will amount to $4,500+$340+$670=$5,510. The following accounting entry will be made:

D Inventory (raw materials – current assets category) $5,510

C Cash (Accounts Payable – if inventory was acquired on credit) $5,510

Cost of the raw materials to be included into expenses only when it will be used in manufacturing process and finished goods will be sold, i.e. sales revenue will be earned.

Networking For Life

Ranil Herath asked:

Most of us think of networking when we are out of work, looking for a new job, venturing out on our own to build a new business or struggling to keep our own businesses afloat. This perhaps may be the worst time to start networking! Networking is not only about ‘what’s in it for me.’ It is also an opportunity to see ‘what I can do for the other person.’ I find that this approach to networking has allowed me to build and sustain an extensive network of great professionals around the world.

It was only a few weeks ago that I met an entrepreneur in Calgary through LinkedIn, a professional networking site. Though his work did not relate directly to my organization he was doing some interesting projects and I was keen to learn more. So I invited him to visit the campus for a meeting. We shared information about what our organizations are doing and what our continuing organizational needs were. We discussed how some of the work he did could benefit our students at DeVry Institute of Technology when they are searching for employment opportunities. I also shared that we were recruiting for some positions and talent was hard to come by for some of these vacancies. Within a week of us meeting, he recommended a person as a possible candidate to fill one of the vacancies that I had mentioned to him. The interview process found him to be the best candidate for the job. He was hired and started working for DeVry in October.

This is a good example of how we should approach networking. I did not meet with an aim to fulfill a business need. I wanted to make a connection, which I did. I was genuinely interested to in getting know another colleague. However, in the process he was able to help my organization and I was able to help his friend. Had I approached networking as way to ‘meet a need’ I would not have made the connection, let alone be of help to one another. A win-win-win situation!

The key to good networking is building long-term professional relationships. I feel that networking can be most rewarding and beneficial when there is no immediate need to be fulfilled. This gives you the opportunity to approach and get to know people from a wide range of backgrounds and positions. Because you are not out to ‘get something’ from networking, it becomes easier to spend time getting know and sharing information with others. As a result, others maybe more receptive to you and would be more likely to want to establish a connection.

It is unfortunate that most people tend to seek out those who hold key positions in organizations that can assist in helping to get jobs and opening up business opportunities. It is also unfortunate that some people approach networking as a race to give out and collect the most number of business cards. I have seen this at many networking events. Such individuals are quick to tell their story and why one should invest in their products/services and move on to the next person. These are very narrow approaches to networking. It’s difficult to establish a good network of people that you can tap into for years, if your approach is short-termed and as a result you may not reap the best benefits out of that connection.

Good networking is also about helping others to make connections. This immediately takes away the need to put yourself first and have the ‘what’s in it for me’ frame of mind and instead apply a ‘how do I get to know you’ and ‘what can I do for you’ attitude. This approach will also open up your mind to network with not only those who are holding senior and key positions in organizations but also people who are starting up and who maybe seeking for opportunities just as you do. Throughout my career I have always been actively engaged in helping someone who is starting out. It gives me great satisfaction to help someone else just as I have been helped at many times in my career. It is my way of sharing what I have received.

I recently took on a person I had known for sometime under my wings. He was a new immigrant and was struggling to establish himself in the Canadian job market despite his excellent credentials. I coached and helped him on building up a resume and facing interviews. I also put him in touch with potential employers and professionals who may assist him in securing employment. I not only introduced him to my network but also made it a point to talk to my network about the person who will be calling on them soon and why he would be an asset. Through one such connection, he was able to secure a management level position in a Toronto based firm in September.

While one makes the connections and builds on relationships, it is also important to maintain them by keeping in touch. Keeping in touch with your contacts via email, over coffee or lunch will allow you to get to know them well and their ongoing needs and also give you an opportunity to update them on your ongoing needs and goals. It is also important to find ways of passing on new opportunities to your contacts or connecting your contacts with each other, if specific needs exist. When I was working in Toronto, I connected with an organization that was looking for a specific training for their engineers. I realized that one of my contacts, who specialized in this type of training, may be of help them. I took the time to introduce the two parties which resulted in the company getting their training requirement fulfilled and my trainer contact getting additional business. So, it is important to know how best you can connect the opportunity with the right person as well. It builds trust and goodwill.

There are many ways one can network. While networking events are good opportunities, there are some very useful online tools and web sites that can help you connect with people from all backgrounds. Websites such as LinkedIn, Xing, Konnects, eCademy and Ryze can help you connect with thousands of other professional like yourselves. Professional membership bodies are another great source and tool. They not only provide networking opportunities with those in the same profession or industry but also will help you to gain additional credentials to enhance your profile. Community service organizations such the Rotary Club can provide great opportunities to build fellowship while serving the community. Volunteering for charity organizations and not-for-profit organizations can also help you build connections and friendships while reaping the benefits of giving back to the community. Stepping up to service on committees or boards of organizations can also open up doors to great networking opportunities.

At DeVry Calgary and the more than 90 locations of DeVry University spread out in the US, students are encouraged to start networking and connecting with the industry well before they graduate. For example, we host the Calgary Chamber of Commerce Small Business Seminars to which some of our students get invited. Not only do these students get to network with business people in Calgary, they also get to listen to talks on timely topics. In our CARD 405 – Career Development course DeVry students learn career strategies, resume building and job search tactics, etc. The final project our students complete is a real life simulation and solution to a business or technological problem. We have professionals from the industry come in to the campus to judge these projects. This allows our students to showcase their talents to the industry experts and at times get hired by them.

Building and fostering relationships is the key to growing a great network. To do this you must invest your time and stay connected. If you are a lifelong networker, you would already have a great network that you can tap into with ease and reap ample rewards. But if you someone who did not network much and wondering when to get started the best time is NOW! All you need is an open mind and a heart to genuinely connect with others.

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