Question

In: Accounting

What is the relationship between physical inventory management and a company's accounting processes? How involved should...

What is the relationship between physical inventory management and a company's accounting processes? How involved should the accounting and finance departments be in assessing the levels and value of current inventory, and why is this important to a company's success? What are the implications of acquiring a capital asset, and what is the accounting difference between ordinary inventory and owning a capital asset?

Solutions

Expert Solution

Value of opening inventory and closing inventory has to be reported in the financial statements which could be a major element in the financial statements of most of the manufacturing and trading entities. Periodical assessment of the physical inventory is essential to arrive correct closing inventory and stock movements to be strictly monitored to prevent pilferage and other malpractices. Actually every movement of stock is reflected in accounting process either by way of purchase or sales or as work in progress. It would be really easy to control inventory management system if it linked with accounting process. It is advisable that the person who is in charge of accounts not be inventory custodian. Book value of inventory and physical inventory should be verified periodically and surprise verification of inventory by authorized persons to be carried out for a better inventory management.

                      Capital assets are generally used to generate income and it is not meant for sale or to be used in production as raw material. These are business facilitating assets like plant and machinery furniture and fixtures, buildings and vehicles for assisting the main trade. So capital assets are for long term purpose and involves huge amount of expenditure. So it is very important to done the cost benefit analysis before acquiring a capital asset.

                                                  The accounting treatment of capital asset and inventory is different. While acquiring a capital asset we recognize it as a fixed asset eg. When we purchase machinery, machinery account will be debited and bank / cash account will be credited and after initial recognition every year depreciation to be provided to recognize tear and wear of the asset. Capital asset to be recognized as noncurrent asset in the year end. When we purchase inventory we are not supposed to mention the name of the asset, we debit purchase account and credit bank/cash/sundry creditors. When we selling the asset sales account to be credit and cash/bank/sundry debtors. The inventory to be recognized as current asset in the year end.


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