This can be a complicated process, since the accountant may use a variety of cost layering systems, such as FIFO, LIFO, or the weighted average method to determine cost. Either conduct a physical inventory count at the end of the period to determine the exact quantities of items on hand, or use a perpetual inventory system to derive these balances (which typically involves the use of cycle counting).ĭetermine cost of ending inventory. Any other costs involved in bringing sellable inventory to the location and condition needed to sell it are designated as overhead, and allocated to all items produced during the accounting period.ĭetermine ending inventory units.
Be sure to accrue purchases at the end of the accounting period if goods have been received but not the related supplier invoice.Īccumulate and allocate overhead costs. As the accounting period progresses and the business receives invoices from suppliers for inventory items shipped to the company, record them either in a single purchases account or in whichever inventory asset account is most applicable. If there is a difference between the beginning balance in the general ledger and the actual cost of the beginning inventory, the difference will flush out through the cost of goods sold in the current accounting period.Īccumulate purchased inventory costs. The actual amount of beginning inventory owned by the company is properly valued and reflects the balances in the various inventory asset accounts in the general ledger. In either case, the accountant needs to reduce ending inventory by the amount of those goods that either were shipped to customers or designated as being customer-owned under a bill and hold arrangement.įollow these steps to arrive at the cost of goods sold journal entry: In the case of merchandise, this usually means goods that were physically shipped to customers, but it can also mean goods that are still on the company's premises under bill and hold arrangements with customers. The cost goods sold is the cost assigned to those goods or services that correspond to sales made to customers.
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