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Every business organization uses inventory to generate sales. Inventory includes the raw material used to produce the goods, the goods which are yet to be completed (work-in-progress), and the finished goods which are ready to be sold.
If an organization manufactures products using raw materials or offers services that may require some raw materials, it must prepare accounting records for inventory.
Inventory can be purchased in two ways- on cash (or) credit.
In this question, we would like to explain both inventories purchased on credit and cash. Starting with its meaning followed by Journal Entries and simple practical problems.
Purchased Inventory on Credit
When an organization purchases raw materials for manufacturing finished products from another organization on agreed terms that consideration (price or value) of raw materials (Inventory) will be paid on some future date then it is called Credit Purchase of Inventory.
Journal Entry for Inventory purchased on credit
1. Modern Accounting Approach
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st Feb | Inventory- Raw material a/c | 100,000 | Asset | Debit- The Increase in Asset. | |
| To Accounts Payable/Supplier a/c | 100,000 | Liability | Credit- The Increase in Liability. |
2. Traditional Accounting Approach
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st Feb | Inventory- Raw material a/c | 100,000 | Real | Debit- What comes into the business. | |
| To Accounts Payable/ Supplier a/c | 100,000 | Personal | Credit- The giver. |
Practical Example
On 1st May Alexa Co., a manufacturer of sofa sets purchased hardwood from Anna Co. for 500,000 on a credit period of 2 months. Journalise the following transaction in the books of Alexa Co.
In the books of Alexa Co.
1. When Inventory is purchased on credit from Anna Co.
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st May | Inventory- Raw material a/c | 500,000 | Asset | Debit- The Increase in Asset. | |
| To Accounts Payable/ Anna Co. a/c | 500,000 | Liability | Credit- The Increase in Liability. |
(Being Inventory purchased on credit).
2. When the consideration (price or value) of Inventory is duly paid,
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st Aug | Accounts Payable/ Anna Co. a/c | 500,000 | Liability | Debit- The Decrease in Liability. | |
| To Cash/Bank a/c | 500,000 | Asset | Credit- The Decrease in Asset. |
(Being consideration duly paid on the due date).
Purchased Inventory on Cash
When an organization purchases raw materials for manufacturing finished products from another organization on payment of cash, it is known as Purchase of Inventory on Cash.
Journal Entry for Inventory purchased on credit
1. Modern Accounting Approach
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st Feb | Inventory- Raw material A/c | 100,000 | Asset | Debit- The Increase in Asset. | |
| To Cash/ Cash at Bank A/c | 100,000 | Asset | Credit- The Decrease in Asset. |
2. Traditional Accounting Approach
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st Feb | Inventory- Raw material a/c | 100,000 | Real | Debit- What comes into the business. | |
| To Cash/ Cash at Bank A/c | 100,000 | Real | Credit- What goes out of the business |
Practical Example
On 1st June, John and Co., a manufacturer of chairs purchased wood from Tom Co. for 200,000 on a credit period of 2 months. Journalise the following transaction in the books of John and Co.
In the books of John and Co.
| Date | Particulars | L.F. | Amount | Nature of Account | Accounting Rule |
| 1st June | Inventory- Raw Material A/c | 200,000 | Asset | Debit- The Increase in Asset | |
| To Cash/ Cash at Bank a/c | 200,000 | Asset | Credit- The Decrease in Asset. |
(Being Inventory purchased on Cash).
Conclusion
The above discussion may be summarised as follows:
- Inventory includes the raw material used to produce the goods, the goods which are yet to be completed (work-in-progress), and the finished goods which are ready to be sold.
- It is a current asset used in the production of goods.
- Inventory may be purchased either on Cash or on credit.
>Related Long Quiz for Practice Quiz 21 – Inventory