This article extends to discuss accounting treatment for addition/purchase, sales, provision, and write-off for the inventory.

Accounting for the purchase of inventory

The following journal entry is posted when inventory is purchased from the vendor/supplier.

Description	Debit	Credit
Inventory (assets)	XXX
Accounts payable (liability)/ cash (asset)		XXX

The debit impact of the given transaction is to add/increase inventory levels in the accounting record. On the other hand, credit impact is to record liability or cash depending on the accounting transactions under analysis.

Accounting for sell of inventory

The following journal entry is posted when inventory is sold to the customer.

Description	Debit	Credit
Cost of sales (Profit and loss)	XXX
Inventory (assets)		XXX

The debit impact of the given transaction is recording expenses against sales. On the other hand, credit impacts records removal of inventory from business books. Similarly, a second journal entry is posted as follows.

Description	Debit	Credit
Accounts receivable / Cash (assets)	XXX
Sales (Profit and loss)		XXX

The debit impact of given transactions is recording cash/receivables in the accounting books. On the other hand, credit impact records sales/revenue in the profit and loss statement.

When closing accounting books at the end of the accounting period, the following closing entries are posted.

Description	Debit	Credit
Profit and loss account	XXX
Cost of sales (cumulative at period end)		XXX

The above entry closes the cost of sales in the profit and loss account.

Description	Debit	Credit
Sales (cumulative)	XXX
Profit and loss account		XXX

The above entry closes sales in the profit and loss account.

So, if the credit balance is higher in the profit and loss account, it’s profit. On the other hand, if the debit balance is higher, it’s a loss for the business.

Let’s understand accounting treatment with the help of a scenario.

Consider the following aspects and numbers of XYZ company.

Item description	Dollar value ($)
Sales	500
Inventory	400
Cost of sales	400
Accounts receivable	500

The following journal entries are posted in the accounting record.

Description	Debit	Credit
Accounts receivable / Cash (assets)	500
Sales (Profit and loss)		500

Description	Debit	Credit
Cost of sales (Profit and loss)	400
Inventory (assets)		400

Closing entry for cost of sales

Description	Debit	Credit
Profit and loss account	400
Cost of sales (cumulative at period end)		400

Closing entry for sales

Description	Debit	Credit
Sales	500
Profit and loss account		500

Please note that after closing, the profit and loss account has an excess of $100 ($500-$400) on the credit side. Hence, its profit was recorded in the accounting books.

Similarly, if there is an excess balance on the debit side, it leads to a loss, but there is a profit in our example.

Accounting for inventory provision & write-off

The following journal entry is posted for providing inventory provision. The provision is provided for obsolete/old inventory.

Description	Debit	Credit
Bad debt (Expense)	XXX
Provision (contra asset)		XXX

The debit impact of the above transaction records expenses in the profit and loss statement. On the other hand, credit impact provides contra for the receivable. The contra balance is provided as part of anticipation that inventory may be removed from accounting records.

Similarly, the write-off entry is posted as follows.

Description	Debit	Credit
Provision (contra asset)	XXX
Accounts receivable		XXX

The debit impact of the given transaction is to remove the provision, as this balance was created on a temporary basis to be used against writing off. On the other hand, credit impact is removing inventory/assets from accounting records.

Conclusion

Inventory is debited, and cash/accounts payable are credited when inventory is purchased. Similarly, inventory is credited against the cost of sales when sold.

Expenses are debited when providing provision, and contra asset is credited. The credit balance of the contra entry account is debited when writing off receivable.