Finished goods inventory involves recording the cost of products that have been completed but not yet sold. I'll provide various scenarios, such as transferring goods from work-in-process to finished goods, selling finished goods, and accounting for finished goods at the end of the accounting period.
Transferring Work-in-Process to Finished Goods
Scenario: ABC Pvt Ltd completes manufacturing products costing ₹2,00,000 and transfers them from Work-in-Process (WIP) to Finished Goods inventory.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Finished Goods Inventory A/c | 2,00,000 | |
| To Work-in-Process Inventory A/c | 2,00,000 | |
| (Being completion of products and transfer to finished goods inventory) |
Explanation:
- Finished Goods Inventory A/c is debited to increase the finished goods inventory.
- Work-in-Process Inventory A/c is credited to decrease the WIP inventory.
Selling Finished Goods
Scenario: ABC Pvt Ltd sells finished goods costing ₹2,00,000 for ₹3,00,000 on credit.
Journal Entry for Recording Sales:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Receivable A/c | 3,00,000 | |
| To Sales Revenue A/c | 3,00,000 | |
| (Being sale of finished goods on credit) |
Explanation:
- Accounts Receivable A/c is debited to reflect the amount owed by the customer.
- Sales Revenue A/c is credited to record the revenue from the sale.
Journal Entry for Recording Cost of Goods Sold (COGS):
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cost of Goods Sold (COGS) A/c | 2,00,000 | |
| To Finished Goods Inventory A/c | 2,00,000 | |
| (Being cost of finished goods sold) |
Explanation:
- Cost of Goods Sold (COGS) A/c is debited to recognize the cost associated with the goods sold.
- Finished Goods Inventory A/c is credited to reduce the finished goods inventory.
End-of-Period Inventory Adjustment
Scenario: At the end of the accounting period, ABC Pvt Ltd has finished goods inventory valued at ₹1,50,000.
Journal Entry (no new entry needed if it remains the same, but adjusting for differences if any):
Adjusting Entry (if the value differs):
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Finished Goods Inventory A/c | XXX | |
| To Inventory Adjustment A/c | XXX | |
| (Being adjustment of finished goods inventory to reflect accurate value) |
Explanation:
- Finished Goods Inventory A/c is debited to increase the inventory if undercounted or credited if overcounted.
- Inventory Adjustment A/c is credited to reflect the adjustment.
Write-down of Finished Goods Inventory
Scenario: ABC Pvt Ltd determines that the net realizable value of its finished goods inventory is ₹1,00,000, which is lower than its cost of ₹1,20,000.
Journal Entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Loss on Inventory Write-down A/c | 20,000 | |
| To Finished Goods Inventory A/c | 20,000 | |
| (Being write-down of finished goods inventory to net realizable value) |
Explanation:
- Loss on Inventory Write-down A/c is debited to record the loss due to the reduction in value.
- Finished Goods Inventory A/c is credited to decrease the inventory to its net realizable value.
