Reporting and Operations

Inventory Assets

Size of Organization: 
Small

Many not-for-profit organizations maintain an inventory of publications or other items held for sale over a long period of time. In these cases, the cost of the inventory item is capitalized as an asset and not taken immediately as an expense. Once the total development costs of the item are accumulated, the number of items owned is determined. A unit cost is then developed by taking the total cost over the number of items produced. Each time an item is sold, the unit cost of that item is expensed:

                               DR            CR
Cost of goods sold    $xx    
Inventory                                $xx

Over time the inventory balance should be reduced to zero.

If the item continues to sell, a second printing (if the item is a publication) might take place. It may be easiest to use the first-in, first-out method for determining unit cost. First, reduce the original inventory balance to zero, then use the unit cost for the second printing when reducing the inventory account.

If the item becomes obsolete over time, it is advisable to determine if the full value of the inventory is valid. If it is not, an allowance for obsolete inventory should be developed. The entry for recording the amount not being reduced due to sales would be:

Expense                                        $xx
Allowance for obsolete inventory     $xx

It is important to periodically count the remaining inventory and compare the total to the accounting records to verify the amounts agree. If there are missing items, the cause should be investigated. The accounts should be adjusted to reflect the new balance if necessary.