Question

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Answer 1

There can be different types of inventory based on nature of business of an enterprise. The

inventories of a trading concern consist primarily of products purchased for resale in their

existing form. It may also have an inventory of supplies such as wrapping paper, cartons, and

stationery. The inventories of manufacturing concern consist of several types of inventories: raw

material (which will become part of the goods to be produced), work-in-process (partially

completed products in the factory) and finished products. In manufacturing concerns inventories

will also include maintenance supplies, consumables, loose tools and spare parts. However,

inventories do not include spare parts, servicing equipment and standby equipment which can be

used only in connection with an item of fixed asset and whose use is expected to be irregular;

such machinery spares are generally accounted for as fixed assets. Similarly, in an enterprise

engaged in construction business, projects under construction are also considered as inventory.

At the year-end every business entity needs to ascertain the closing balance of Inventory

which comprise of Inventory of raw material, work-in-progress, finished goods and other

consumable items. Value of closing Inventory is put at the credit side of the Trading Account and

asset side of the Balance Sheet. So before preparation of final accounts, the accountant should

know the value of Inventory of the business entity. However, we shall restrict our discussion on

inventory valuation of a manufacturing concern and goods of a trading concern.