INVENTORIES

Inventories are assets:

1. In the form of materials or supplies to be consumed in the production

process (examples: materials and supplies awaiting use in the production
process);

2. In the form of materials or supplies to be consumed or distributed in the

rendering of services (examples: office supplies, ammunitions,
maintenance materials);

3. Held for sale or distribution in the ordinary course of operations (examples:

merchandise purchased by an entity and held for resale, or land and other
property held for sale, agricultural produce); or

4. In the process of production for sale or distribution (examples: goods

purchased or produced for distribution to other parties for no charge or for
a nominal charge like educational books produced by a health authority for
donation to schools).

Cost of Inventories. The cost of inventories shall comprise all costs of

purchase, costs of conversion (materials, labor and overhead) and other costs
incurred in bringing the inventories to their present location and condition,
excluding abnormal amounts of wasted materials, labor, other production and
selling costs, administrative overheads that do not contribute to bringing
inventories to their present location and condition. Trade discounts, rebates,
and other similar items are deducted in determining the costs of purchase.

The weighted average method shall be used for costing inventories. This
method calls for the re-calculation of the average cost of all items in stock
after every purchase. Therefore, the weighted average cost is the total cost of
all units subsequent to the latest purchase, divided by their total number of
units available. The Accounting Division/Unit shall be responsible in
computing the cost of inventory on a regular basis as shown in the following
sample Supplies Ledger Card (SLC)

Recognition as an Expense. When inventories are sold, exchanged, or

distributed, their carrying amount shall be recognized as an expense in the
period in which the related revenue is recognized. If there is no related
revenue, the expense is recognized when the goods are distributed or the
related service is rendered.

Perpetual Inventory Method. Supplies and materials purchased for inventory

purpose shall be recorded using the perpetual inventory system, resulting in a
more accurate inventory records and a running total for the cost of goods sold
in each period.

Regular purchases shall be coursed through the inventory account and issues
thereof shall be recorded as they take place except for supplies and materials
purchased out of PCF for immediate use or on emergency cases which shall be
charged directly to the appropriate expense accounts

Semi-expendable Property. Tangible items below the capitalization threshold

of P15,000 shall be accounted as semi-expendable property. The following
policies apply as follows:

a. Semi-expendable property which were recognized as PPE shall be

reclassified to the affected accounts.
b. These tangible items shall be recognized as expenses upon issue to the end-
user.

Inventory Accounting System. The Inventory Accounting System consists of

the system of monitoring, controlling and recording of acquisition and
disposal of inventory. The system starts with the receipt of the purchased
inventory items.

Illustrative Accounting Entries. The following are the illustrative accounting

entries for transactions involving inventories:

a. Inventory Held for Sale:

Merchandise Inventory P 1,000
Cash-Modified Disbursement
Systems (MDS), Regular P 1,000
To recognize purchase of inventories for sale amounting to P 1,000

Cash-Collecting Officers P 1,200

Sales Discounts 300
Sales Revenue P 1,500
To recognize sale of merchandise for P 1,500 at 20% discount

Cost of Sales 1,000

Merchandise Inventory 1,000
To recognize sale of merchandise inventory worth P 1,000

Sales Revenue P 1,500

Revenue and Expense
Summary P 1,500
To close the Revenue accounts to Revenue and Expense Summary account

Revenue and Expense Summary P 1,300

Cost of Sales P 1,000
Sales Discount 300
To close the Expense accounts to Revenue and Expense Summary account

Revenue and Expense Summary 200

Accumulated Surplus/(Deficit) 200
To close the Revenue and Expense Summary account to Accumulated
Surplus/(Deficit) account
b. Inventory Held for Distribution:

Welfare Goods for Distribution P 2,000

Accounts Payable P 2,000
To recognize the purchase of welfare goods for distribution

Accounts Payable P 2,000

Cash-MDS, Regular P 2,000
To recognize payment of welfare goods purchased

Welfare Goods Expenses P 2,000

Welfare Goods for Distribution P 2,000
To recognize the issue/distribution of goods amounting to P 2,000

Revenue and Expense Summary P 2,000

Welfare Goods Expenses P 2,000
To close the expense account to Revenue and Expense Summary account

Accumulated Surplus/(Deficit) P 2,000

Revenue and Expense Summary P 2,000
To close the Revenue and Expense Summary account to Accumulated
Surplus/(Deficit) account

C. Inventory Held for Consumption

Office Supplies Inventory P 600

Accounts Payable P 600
To recognize purchase of office supplies on account amounting to P 600

Office Supplies Expenses P 400

Office Supplies Inventory P 400
To recognize issue/consumption of office supplies amounting to P 400

Revenue and Expense Summary P 520

Office Supplies Expenses P 520
To close the expense accounts to Revenue and Expense Summary account

Accumulated Surplus/(Deficit) P 520

Revenue and Expense Summary P 520
To close the Revenue and Expense Summary account to Accumulated
Surplus/(Deficit) account
D. Semi-Expendable Machinery and Equipment:

Semi-Expendable Machinery P 13,000

Cash-MDS, Regular P 13,000
To recognize purchase of air-conditioning unit amounting to P 13,000

Semi-Expendable Office Equipment P 14,500

Cash-MDS, Regular P 14,500
To recognize purchase of printer amounting to P 14,500

Semi-Expendable Machinery and

Equipment Expenses P 27,500
Semi-Expendable Machinery P 13,000
Semi-Expendable Office Equipment 14,500
To recognize the issue of semi-expendable machinery and office equipment to
end-users

Repairs and Maintenance-Semi-

Expendable Machinery and Equipment P4,000
Cash-MDS, Regular P4,000
To recognize repair of the air-conditioning unit two years after purchase

Revenue and Expense Summary P 31,500

Semi-Expendable Machinery
and Equipment Expenses P 27,500
Repairs and Maintenance-
Semi-Expendable Machinery
and Equipment 4,000
To close the expense account to Revenue and Expense Summary account

Accumulated Surplus/(Deficit) P 31,500

Revenue and Expense Summary P 31,500
To close the Revenue and Expense Summary account to Accumulated
Surplus/(Deficit) account

E. Semi-Expendable Furniture, Fixtures and Books:

Semi-Expendable Furniture and

Fixtures P 10,000
Cash-Modified Disbursement
System (MDS), Regular P 10,000
To recognize purchase of sofa set amounting to P 10,000

Semi-Expendable Books P 12,500

Cash-Modified Disbursement
System (MDS), Regular P 12,500
To recognize purchase of books amounting to P 12,500
Semi-Expendable Furniture,
Fixtures and Books Expenses P 22,500
Semi-Expendable Furniture
and Fixtures P 10,000
Semi-Expendable Books P 12,500
To recognize the issue of semi-expendable furniture, fixtures and books to
end-users

Revenue and Expense Summary P 22,500

Semi-Expendable Furniture,
Fixtures and Books Expenses P 22,500
To close the expense account to Revenue and Expense Summary account

Accumulated Surplus/(Deficit) P 22,500

Revenue and Expense Summary P 22,500
To close the Revenue and Expense Summary account to Accumulated
Surplus/(Deficit) account