Key Concepts
The Inventory account records every transaction that changes how much inventory a business holds.
Every transaction is recorded in two accounts — that is double entry. To interpret an account, check two things for each entry: whether it is a debit or a credit in this account, and the Particulars column, which names the other account in the entry. Together they tell you what the entry was for.
| Entry side | What it means |
|---|---|
| Debit | Inventory increases — bought from a supplier, or a customer returns goods |
| Credit | Inventory decreases — sold at cost, returned to a supplier, or written down for impairment loss |
Read the Particulars column — it names the other account. That tells you the real transaction (e.g. "Trade payables" = bought; "Cost of sales" = sold, or a customer return; "Impairment loss on inventory" = written down). A debit means inventory increasing (in); a credit means inventory decreasing (out).
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X6 | ||||
| 1 Aug | Balance b/d | 3,200 Dr | ||
| 6 Aug | Trade payables — Rockford Goods | 1,500 | 4,700 Dr | |
| 12 Aug | Cost of sales | 900 | 3,800 Dr | |
| 15 Aug | Trade payables — Rockford Goods | 200 | 3,600 Dr | |
| 20 Aug | Cost of sales | 150 | 3,750 Dr | |
| 30 Aug | Impairment loss on inventory | 130 | 3,620 Dr | |
| 1 Sep | Balance b/d | 3,620 Dr |
Interpret each entry:
| Date | Interpretation |
|---|---|
| 6 Aug | Bought inventory worth $1,500 on credit from Rockford Goods |
| 12 Aug | Sold inventory; the cost of the goods sold was $900 |
| 15 Aug | Returned damaged goods worth $200 to credit supplier Rockford Goods |
| 20 Aug | A customer returned goods; the cost of the returned goods was $150 |
| 30 Aug | Recorded an impairment loss of $130 — the net realisable value of the remaining inventory fell below its cost |
Verify: $3,200 + $1,500 − $900 − $200 + $150 − $130 = $3,620 Dr ✓
Labelling a purchase entry as "Inventory." The particulars column names the other account in the entry — not the account itself. Write "Trade payables — Rockford Goods" (or "Cash at bank" if paid immediately), never "Inventory."
Labelling a return-to-supplier entry as "Returns to supplier." Under the perpetual method, a return to a credit supplier is recorded straight through Trade payables — there is no separate returns account. The correct particulars is "Trade payables — [Supplier]."
Confusing a purchase with a customer return. Both are debit entries in the Inventory account, but a purchase has Trade payables (or Cash at bank) as the other account, while a customer return has Cost of sales — check the particulars column to tell them apart.
Treating the impairment loss as a debit. An impairment loss reduces the value of inventory, so it is a credit entry, not a debit.