8. Inventory Write Offs & Drawings Flashcards
What is the accounting treatment for inventory drawings?
If an owner takes items of inventory from the business as drawings, we do not need to adjust opening or closing inventory.
Cost of sales is reduced with the cost of items withdrawn.
The journal entry debits the drawings account and credits cost of sales.
When a question says that inventory has been used or removed from the business by the owner, it is important to ensure that it is accounted for as a drawing.
Why may a business be unable to sell all the goods purchased before they can be sold?
- Be lost or stolen
- Be damaged and become worthless
What is the accounting treatment for inventory write offs?
In the rare situation where a material amount of inventory has been stolen or destroyed then then the usual treatment of inventories would unfairly distorted view of the entities gross profitability.
To overcome this, the cost of the goods stolen or destroyed is removed from purchases and shown in other expenses below the gross profit line
The journal entry debits the other expenses account and credits purchases.
Anny insurance pay outs as a result of the damaged goods will be recorded in Other income with the following journal entry: debit bank/cash, credit other income
