Key Concepts
The cost of inventory purchased includes:
- The purchase price of the goods, AND
- All costs incurred to bring the goods in and get them ready for sale
Examples of additional costs included:
- Transport costs
- Customs duties
- Insurance for goods in transit
- Packing materials
- Wages for employees involved in repacking goods
Note:Only include costs to bring inventory in. Costs to deliver goods to customers or to sell them (e.g. sales staff salaries) are selling expenses — they are not part of the cost of inventory purchased.
Journal entries for inventory:
| Transaction | Debit | Credit |
|---|---|---|
| Purchase inventory on credit | Inventory (+asset) | Trade payables — [Supplier] (+liability) |
| Return inventory to credit supplier | Trade payables — [Supplier] (−liability) | Inventory (−asset) |
"From factory to shelf." Include every cost needed to move inventory from the supplier to the point where it is ready for sale. Stop there — anything after that point (delivering goods out to customers, or paying staff to sell them) is a selling expense, not part of inventory cost.
- 3 Sep — Purchased 3,200 ceramic mugs costing $4,800 on credit from Bayfront Supply Co.
- 14 Sep — Received an invoice of $120 from Swift Logistics Co for transportation costs, insurance for goods in transit, and customs duties incurred to import the goods.
- 22 Sep — Paid $85 to deliver mugs to a customer.
- 28 Sep — Paid $250 as salary to the sales assistant who sold the mugs.
Include only the costs to bring the goods in and make them ready for sale:
Cost of inventory purchased = $4,800 + $120 = $4,920
The $85 delivery to the customer and the $250 sales assistant's salary are selling expenses — they happen after the goods are ready for sale, so they are not part of inventory cost.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 3 Sep | Inventory | 4,800 | |
| Trade payables — Bayfront Supply Co | 4,800 | ||
| 14 Sep | Inventory | 120 | |
| Trade payables — Swift Logistics Co | 120 |
(The $85 delivery and $250 salary are recorded as selling expenses, not inventory — so they do not appear in these entries.)
Including delivery costs to customers. These are selling expenses, not part of the cost of inventory. Only include costs to bring goods in — not to send goods out.
Forgetting to include transport costs. Students often record only the purchase price and forget that the transport cost to bring the goods in is also part of the cost of inventory.
Recording the transport invoice to the wrong account. If the invoice is unpaid, credit Trade payables — Swift Logistics Co. Do not credit Cash at bank or Cash in hand unless payment is made immediately.
Recording salaries of staff who sell the goods as inventory cost. Salaries paid to sales staff are selling expenses — they are part of running the shop, not the cost of bringing goods in. Only costs incurred up to the point goods are ready for sale count as inventory cost.