Inventory Definition, types, and Cost of goods sold (COGS)
Inventory is the good held by the business for consumption or resells purpose. Inventories items differ in an organization to another organization as according to the nature of business activity.
Inventories are the major business products for which the organization is dealing on or supposed to deal. They are the intended products for which the reason of an organization to exists stand on. Inventory is a major revenue generating item from the sale of which the organization earns or acts to earn a profit.
Inventory represents one of the most important assets that most businesses possess because turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholder’s/ owners.
Inventory’s types on the basis of nature
According to the nature of the inventories may be classified as raw materials, working-in-progress, and finished goods. These categorizations of three classes of inventories are important for manufacturing company’s or businesses.
To produce products in a manufacturing company’s or in businesses it is essential to collect the raw materials. Raw materials are the first item for the manufacturing businesses used to produce final goods. The goods which are not brought into the production process called raw materials. Raw materials have a natural state. For example, sugarcane, fiber for the textile company, wood for the furniture, etc. are some of the raw materials.
Working in Progress
For example, sugarcane, fiber for the textile company, wood for the furniture, etc. are some of the raw materials. When these raw materials are got in the production process but not readily available for consumption are called working in progress. It is also known as under production process. In other words, it is a stage between the raw materials and finished goods. How much time consumes the working in progress goods to convert it into the finished goods, it depends towards the techniques used by the company in the production.
After the completion of production available for end-use are called finished goods. For example, sugarcane is a raw material and its finished good is Sugar. Similarly, these goods are completed by the manufacturing company are not directly used or purchased by the customers. Merchandise companies are mostly involved in process of purchasing and selling of finished goods.
Inventory’s types on the basis of time
For the merchandise company’s there is only one class or type of inventory that is finished goods. The organization generally spend one type of asset in the acquisition of inventory. The inventory may be classified on the basis of the time period as beginning inventory or stock and ending inventory or stock.
The inventories which are available at the beginning of the year are called beginning inventory. Whereas the inventories which are available at the end of the year are called ending inventories. The ending inventory of any accounting year is the beginning inventory for the next year.
The cost of goods sold is an expense which is to be deducted from the revenue to determine the profit amount. It is the cost of the units that are sold by the business during the year. It calculates as:
Cost of good sold = Cost of goods available for sale – Cost of ending inventory
The cost of goods available for sale is the cost of units that are available during the year for selling purpose. It includes the cost of beginning inventory and cost of units purchased during the year. Mathematical expression as:
Cost of goods available for sale = Cost of beginning inventory + Cost of purchase
The cost of ending inventory is the cost of the units which are remain to be from sold during the year.
Cost of ending stock = Cost of goods available for sale – Cost of goods sold
Calculation of cost of goods sold
|Cost of goods sold (COGS)||Amounts|
Add: Purchase (including transportation, freight, carriage, etc)
Less: Allowances, purchase return
|Cost of goods available for sale|
Less: Cost of ending stock
|Cost of goods sold||xxx|