ACC1100 · Introduction To Financial Accounting
Inventory
Inventory is the trader’s lifeblood asset — goods held for sale — and AASB 102 governs two questions ACC1100 examines relentlessly: at what amount do we carry each unit, and which cost leaves the business on a sale. Monash journalises the perpetual system only, where the Inventory account is updated continuously, so every sale generates two entries: one at the selling price (revenue) and one at the cost price (moving the goods’ carrying amount into Cost of Sales). Cost is determined by capitalising purchase price, duties, freight-in and handling (deducting trade discounts), and when units were bought at different prices you choose a cost-flow assumption — FIFO or weighted-average (LIFO is not permitted). Two year-end adjustments finish the cycle: the stocktake loss/gain and writing inventory down to the lower of cost and net realisable value.
What this chapter covers
- 017.1 What counts as cost (capitalise vs expense)
- 027.2 Perpetual vs periodic recording
- 03The two-entry sale — revenue and cost together
- 047.4 Cost-flow assumptions: FIFO vs weighted-average (no LIFO)
- 05The rising-price effect on COGS and closing inventory
- 067.5 Lower of cost & NRV, and the stocktake loss/gain
Worked example: weighted-average cost, the two-entry sale, and NRV
- +1(a) Goods available = (100×12) + (200×15) + (100×18) = 1,200 + 3,000 + 1,800 = $6,000 over 400 units.
- +1Weighted-average unit cost = 6,000 ÷ 400 = $15.00.
- +1(b) Entry 1 (revenue): Dr Cash/AR 7,500 / Cr Sales 7,500 (250 × $30, selling price).
- +1Entry 2 (cost): Dr Cost of Sales 3,750 / Cr Inventory 3,750 (250 × $15, cost price). Gross profit = 7,500 − 3,750 = $3,750.
- +1(c) The remaining 150 units cost $15 but NRV is $13. Since NRV < cost, write down by (15 − 13) per unit.
- +1Write-down = 150 × $2 = $300: Dr Inventory Write-Down (expense) / Cr Inventory $300 — carry the inventory at the lower NRV.
Key terms
- Perpetual system
- The recording system Monash journalises: the Inventory account is updated continuously, so cost is recorded at every sale and a physical count can reveal a measurable stocktake loss or gain. Contrast the periodic system (described only), which uses a Purchases account and computes cost of sales only after a stocktake.
- The two-entry sale
- Under the perpetual system every sale produces two journal entries — Dr Cash/AR, Cr Sales at the selling price, and Dr Cost of Sales, Cr Inventory at the cost price. Forgetting the second entry is the most common topic error.
- Cost-flow assumption
- When identical units cost different amounts, the rule for which cost attaches to Cost of Sales versus closing inventory. AASB 102 permits FIFO (oldest costs to COGS) and weighted-average; LIFO is not permitted.
- Weighted-average unit cost
- Total cost of goods available divided by total units available — the cost used in the cost side of every sale until the next purchase. It smooths price swings across both Cost of Sales and closing inventory.
- Net realisable value (NRV)
- Estimated selling price less estimated costs of completion and costs to sell. Inventory is carried at the lower of cost and NRV: if NRV is below cost, write down by (cost − NRV) × units; if NRV is at or above cost, do nothing.
Inventory FAQ
Why does every sale need two journal entries?
Under the perpetual system the Inventory ledger must always show what is on hand, so a sale records both the revenue (Dr Cash/AR, Cr Sales at the selling price) and the cost of the goods leaving (Dr Cost of Sales, Cr Inventory at the cost price). A sale that only credits Sales leaves Inventory overstated and Cost of Sales understated — profit is wrong twice over. Forgetting the second entry is the single most common exam error.
Can I use LIFO?
No. AASB 102 permits only FIFO and weighted-average; LIFO is never an option — reject it on sight. FIFO sends the oldest costs to Cost of Sales (so closing inventory holds the most recent costs); weighted-average uses one blended cost for both.
When prices are rising, which method gives higher profit?
FIFO. With rising unit costs, FIFO expenses the older, cheaper costs first, giving a lower Cost of Sales and higher closing inventory and profit; weighted-average sits in between. Examiners often ask only for the direction, not a full layered schedule.
Do I compare NRV to cost or to the selling price?
To cost. The benchmark is always cost — you write inventory down only when NRV falls below cost, and never down to or against the selling price. If NRV is at or above cost, make no entry (you never write inventory up), and the write-down is an expense in the period it occurs.
Exam move
Make the perpetual two-entry sale automatic: a sale is always revenue (at selling price) AND cost (at cost price), and a return reverses both legs. Be able to compute a weighted-average unit cost (goods available ÷ units available) and to state the rising-price direction (FIFO lower COGS, weighted-average in between, LIFO never). For the year-end adjustments, reconcile the ledger to the count for a stocktake loss/gain, and apply lower of cost and NRV — comparing NRV to cost, not to selling price, and never writing up. Determine unit cost carefully too: deduct trade discounts, capitalise freight-in but expense freight-out.
