Accounting and Bookkeeping
Inventory is recorded on the books of an organization when the organization has items it creates or purchases and then sells to the public. A common form of inventory for nonprofits is publications. The value of inventory is determined by using the price the organization paid for acquiring the inventory. The formula below outlines the general flow of inventory:
Beginning Balance + Purchases - Cost of Goods Sold = Ending Inventory
The beginning balance and purchases are pretty straight forward; they are recorded at cost. But there are several methods for determining cost of goods sold. These different methods have to do with how the cost of the inventory over time is tracked. You can generally expect the price of obtaining a single inventory item to change over time. The methods address how these price fluctuations are tracked by the organization. The three most common and easiest methods to follow are:
- First-In-First-Out: works just like it sounds, the oldest inventory of an item is the first to be sold and leave the inventory balance
- Last-In-First-Out: works the opposite way, with the newest inventory being sold first
- Average Cost: takes the average of the value of an inventory item to determine its cost when it leaves inventory
Below is a comparison of the three methods based on the following situation:
XYZ Organization produces books to sell to the general public. Its most popular book currently costs the organization $5.00 per book to produce when 100 books are printed. Last month it cost $4.50 per book to print 100 books. Here is what the inventory of books looks like under the three separate methods, assuming the organization printed 100 books last month, another 100 books this month, and sold 35 books in the current month.
For the First-In-First-Out method, the cost of goods sold was calculated by multiplying 35 by $4.50, since that was the oldest cost of the inventory sold. Last-In-First-Out was calculated multiplying 35 by $5.00, since that was the newest cost of the inventory sold, and the average cost was calculated by multiplying $35 by $4.75, the average cost of the 200 books in inventory.
Below are sample journal entries for how to record inventory transactions.