This post describes the most common inventory-related journal entries. The first section contains entries for goods in transit, beginning with the receipt of raw material and progressing through the various types of inventory to their eventual sale to customers. The second section contains entries listing common adjustments to inventory, including obsolescence, physical count adjustments, and abnormal scrap. The final block of entries shows how to shift indirect costs of various kinds into the overhead cost pool, and then how to allocate these costs back out to either the cost of goods sold or inventory. For each journal entry, there is a sample description, as well as the most likely debit and credit for each account used within the entry. Finally, inventory transaction best practice will close this post.

Goods in Transit Journal Entries

Received Goods - Received goods are proposed to increase inventory levels as a result of a supplier delivery. Here is the journal entry:

[Debit]. Raw materials inventory = $xxx
[Credit]. Accounts payable = $xxx

Move Inventory To Work-In-Process - This activity shifts the cost of inventory to the work-in-process (WIP) category once production work begins on converting it from raw materials to finished goods. The journal entry would be as below:

[Debit]. Work-in-process (WIP) inventory = $xxx
[Credit]. Raw materials inventory = $xxx

Move Inventory To Finished Goods - This activity shifts the cost of completed inventory from work-in-process inventory to finished goods inventory. Here is the journal entry:

[Debit]. Finished goods inventory = $xxx
[Credit]. Work-in-process inventory = $xxx

Sell Inventory - This activity records the elimination of the inventory asset as a result of a product sale, shifting the asset to an expense and also recording the creation of an accounts receivable asset to reflect an unpaid balance from the customer on sale of the product. A pair of journal entry is made:

[Debit]. Cost of goods sold = $xxx
[Credit]. Finished goods inventory = $xxx

And;

[Debit]. Accounts receivable [or cash] = $xxx
[Credit]. Revenue [or sales] = $xxx

Inventory Adjustments

Adjust Inventory For Obsolete Items - This activity made to charge an ongoing expense to the cost of goods sold that increases the balance in a reserve against which obsolete inventory can be charged (first entry). The second entry charges off specific inventory items against the reserve.

[Debit]. Cost of goods sold = $xxx
[Credit]. Obsolescence reserve = $xxx
(to charge the obsolete inventory)

[Debit]. Obsolescence reserve = $xxx
[Credit]. Raw materials inventory xxx
[Credit]. Work-in-process inventory xxx
[Credit]. Finished goods inventory xxx
(To Charge specific inventory off against the obsolescence reserve)

Adjust Inventory To Lower Of Cost Or Market - This activity reduces the value of inventory to a market price that is lower than the cost at which it is recorded in the company records. The second journal entry shows an alternative approach where the credit is made to an inventory valuation account instead, from which specific write-offs can be completed at a later date. The journal entries are:

[Debit]. Loss on inventory valuation = $xxx
[Credit]. Raw materials inventory = $xxx
[Credit]. Work-in-process inventory = $xxx
[Credit]. Finished goods inventory = $xxx

And;

[Debit]. Loss on inventory valuation = $xxx
[credit]. Reserve for reduction in inventory value = $xxx

Adjust Inventory To Physical Count - This activity adjusts inventory balances, either up or down, as a result of changes in the inventory quantities that are noted during a physical count. The following entries assume that there are increases in inventory balances. If there are decreases in the inventory balances, then the debits and credits are reversed.

[Debit]. Raw materials inventory = $xxx
[Debit]. Work-in-process inventory = $xxx
[Debit]. Finished goods inventory = $xxx
[Credit]. Cost of goods sold = $xxx

Write Off Abnormal Scrap/Spoilage - This activity shifts unexpected, one-time scrap or spoilage costs directly to the cost of goods sold, effectively writing off this amount in the current period. The journal entry is:

[Debit]. Cost of goods sold = $xxx
[Credit]. Work-in-process inventory = $xxx

Valuation Of Inventories

Record Normal Scrap/Spoilage - This activity shifts the normal, expected amount of scrap or spoilage cost to the overhead cost pool, from where it is allocated as a part of overhead to inventory. The journal entry is:

[Debit]. Overhead cost pool = $xxx
[Credit]. Work-in-process inventory = $xxx

Transfer Costs To Overhead Cost Pools - This activity transfers manufacturing expenses into one or more overhead cost pools for later allocation to inventory and the cost of goods sold. The journal entry would be as below:

[Debit]. Overhead cost pool = $xxx
[Credit]. Maintenance expenses = $xxx
[Credit]. Manufacturing supplies = $xxx
[Credit]. Rent, manufacturing related = $xxx
[[Credit]. Repairs, manufacturing related = $xxx
[Credit]. Salaries, maintenance department = $xxx
[Credit]. Salaries, materials handling department = $xxx
[Credit]. Salaries, production control department = $xxx
[Credit]. Salaries, purchasing department = $xxx
[Credit]. Salaries, quality control department = $xxx
[Credit]. Salaries, supervisory = $xxx
[Credit]. Scrap, normal = $xxx
[Credit]. Utilities = $xxx
[Credit]. Depreciation—various accounts = $xxx

Allocate Overhead Costs To Inventory - This activity shifts the amount of costs built up in the overhead cost pool to the work-in-process and finished goods inventory categories, as well as to the cost of goods sold for any inventory sold during the period. The journal entry is:

[Debit]. Cost of goods sold = $xxx
[Debit]. Work-in-process inventory = $xxx
[Debit]. Finished goods inventory = $xxx
[Credit]. Overhead cost pool = $xxx

Assign Manufacturing Costs To Joint Products - Based on the cost assignment method used, to assign manufacturing cost pools to completed joint products, the following journal entry is made:

[Debit]. Finished goods inventory = $xxx
[Credit]. Overhead cost pool = $xxx

Inventory Transactions Best Practice

There can be an enormous number of inventory transactions—recording initial receipt, quality review, putaway, picking, and delivery either to customers or the shop floor, depending on the transaction. This area is rife with errors, especially if the staff must manually log all entries into a computer system. This section describes techniques for reducing the inventory transaction error rate.

One of the simplest improvements is to eliminate any data entry backlogs. When several transactions are not entered at once, the on-hand quantities of inventory can become inaccurate, making it difficult to plan purchasing and production activities, as well as cycle counting. To eliminate backlogs, management should emphasize its importance in the warehouse manager’s job review. Also, consider additional data entry training for the warehouse staff, as well as dedicating one person to nothing but data entry (which also tends to reduce data entry errors).

Another simple error correction technique is to run an inventory on-hand quantity report every day and search it for negative inventory balances. When found, investigate the underlying transactions causing the negative balance, and correct these problems. This approach works best if there is easy access in the computer system to all inventory transactions, along with the date and time when they were created and who entered them. This additional information is critical for tracking down problems.

Another way to spot transaction problems is to cycle count the inventory, so that someone is constantly comparing on-hand to book inventory balances. The key activity here is not finding discrepancies but rather investigating why they occurred.

Continuous cycle counts put ongoing emphasis on bomb-proofing transactions, so the number of errors should decline precipitously if this approach is followed.

A primary cause of inventory transaction errors is manual data entry. Given the sheer volume of transactions, it is almost impossible not to have errors. One way to avoid the problem is to use bar codes. Under this approach, a bar code is added to a product as soon as it arrives at the receiving dock, detailing the item description, quantity, and unit of measure. As long as the information contained in the bar code is correct, all subsequent scans of this information will be correct as well. The concept can be taken a step farther by bar coding all inventory locations. By doing so, one can eliminate nearly all manual entries from inventory transactions.

Even bar coding can cause problems if scanned information is being stored in handheld units carried by the warehouse staff and only downloaded to the central computer at the end of their shifts. Under this approach, information may be updated with as much as an eight-hour delay. A much better alternative is to issue radio-frequency scanners to the warehouse staff, so any scanned transactions are immediately transferred by radio transmission to a receiver that is linked to the central computer system. Wireless scanning units are expensive, but this is an excellent way to ensure real-time entry of inventory transactions.

If a wireless system is installed, one can consider shifting to the ultimate in warehouse systems—a warehouse management system. This computerized system runs all warehouse functions in the most efficient manner possible by issuing commands to the wireless terminals being carried by the warehouse staff. It tells them where to put away inventory items based on their usage patterns, where pickers should go to obtain inventory while walking the shortest possible distance, where incoming trailers should dock in order to shorten the putaway time from them to the warehouse racks, and so on. Warehouse management systems are expensive, so they are only cost effective for the largest warehouse systems.

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